Virgin Atlantic Airways Limited –v- Zodiac Seats UK Limited [2013] UKSC 46, July 2013

Summary

It is no longer possible for a patentee to pursue a damages claim in the English courts if the relevant parts of the patent have been declared invalid after judgment has been given in the patentee’s favour on infringement. This decision overturns 100 years of practice whereby patentees have been able to pursue damages claims despite a subsequent revocation of the patent. The Supreme Court also raised the possibility that a defendant might seek to overturn a prior determination of damages in such circumstances, possibly even if the defendant has already made payment.

The Supreme Court also recommended a change in practice in the Patents Court in relation to applications to stay proceedings pending an EPO opposition, and we expect the court to be more open to agreeing a stay in future.

Analysis

Virgin had succeeded in a patent infringement action in respect of a European patent (UK) and, in addition to obtaining an injunction, wished to pursue a damages enquiry in the ordinary way. A stay of the English proceedings, pending the final outcome in the EPO, had been refused. Prior to the commencement of the damages enquiry, however, the European Patent Office found all relevant claims to be invalid. Whilst the injunction was as a result discharged, the Court of Appeal had refused to discharge the order for a damages enquiry, relying on principles of estoppel (‘res judicata’ or ‘cause of action estoppel’): in a nutshell, it was too late to deny the effect of the order for an enquiry. The defendant, Zodiac, challenged this refusal in the Supreme Court.

In summary, the sequence of events had been as follows:

Click here to see table.

The significance of the dispute is highlighted in the opening paragraph of Lord Sumption’s speech: “In this case, Virgin Atlantic Airways Ltd wishes to recover damages exceeding £49,000,000 for the infringement of a European Patent which does not exist in the form said to have been infringed.

Zodiac had in fact already paid £3,600,000 pursuant to an undertaking by which it was allowed to complete certain orders provided that it accounted to Virgin for £10,000 per seat.

Zodiac could no longer appeal the liability decision, but wished to contend in the enquiry as to damages that there had been no damages, because the patent had been retrospectively amended so as to remove the claims held to have been infringed. They therefore appealed the Court of Appeal’s decision of February 2011.

The Court of Appeal had applied the estoppel principles established in earlier cases reaching back over 100 years, including most recently the decision of the Court of Appeal in Unilin Beheer BV v Berry Floor NV [2007] FSR 635 as well as

Poulton v Adjustable Cover and Boiler Block Co [1908] 2 Ch 430 and Coflexip SA v Stolt Offshore MS Ltd (No 2) [2004] FSR 708. Those cases were based on different fact patterns but with similar outcomes, which can be summarised as follows. In all cases, the patent had been found valid and infringed and a damages enquiry was ordered:

Poulton –v- Adjustable Cover (1908): British patent; the defendant found new prior art and successfully brought a new revocation action.

Coflexip –v- Stolt (2004): British patent; a third party succeeded in revoking the patent during the course of the damages enquiry.

Unilin Beheer –v- Berry Floor (2007): EP patent; amendment in the EPO – defendant no longer infringing.

In each case, the ensuing damages enquiry was held not to be affected by the revocation or amendment of the patent, although Lord Justice Neuberger (as he then was) dissented in the Court of Appeal in Coflexip.

The Supreme Court in Virgin has swept these decisions into the waste bin of history, with Lord Sumption giving the leading judgment and Lord Neuberger adding his own comments in support. The historical decisions had been incorrect for two principal reasons. First, because ‘cause of action estoppel’ is only absolute in respect of points actually decided on the earlier occasion. Secondly, because revocation of the patent was an act in rem which determined the status of the patent as against the world. It had been revoked by the authority which had granted it and must be treated as never having existed. Although the patent had been revoked on the ground of invalidity, the issue which the defendant wished to raise on the enquiry was not invalidity but revocation. A challenge to the order for an enquiry in such circumstances therefore did not amount to a rehearing of the earlier liability decision, and there were no relevant policy considerations militating against such challenge.

Their lordships also considered the position under the laws of France, Germany and the Netherlands, concluding that there was no consistent approach supporting Virgin’s position and, if anything, that these countries’ laws were more consistent with Zodiac’s contentions. However, a comparison with other countries’ practices was not considered to bear much weight, as this was a question of domestic law in an area in which there is no harmonisation.

What Next?

The Supreme Court has clearly determined that, where judgment is given in an English court that a patent (whether English or European) is valid and infringed, and the patent is subsequently retrospectively revoked or amended (whether in England or at the EPO), the defendant is entitled to rely on the revocation or amendment on the enquiry as to damages. It is clear from the speech of Lord Neuberger in particular, that it is unlikely that the enquiry would be expected to proceed at all in such circumstances.

What if the damages enquiry were already concluded? And indeed, what if the defendant has already paid? Lord Sumption largely steered clear of expressing any view, although he noted that a decision on an enquiry would amount to judgment for a liquidated sum, which could only be challenged on appeal, and that the Patents Act 1977 did not appear to offer any route to reopening such a decision.

Lord Neuberger, however, no doubt relishing the opportunity to make good on his dissenting judgment in Coflexip, went further. First, he had no doubt that a defendant can rely on a revocation or amendment decision in a damages enquiry at any time up until judgment for the assessed damages has been drawn up. He would also expect the court normally to agree to reopen a damages judgment if any revocation or amendment is raised before the assessed damages have been paid.

More intriguingly, Lord Neuberger postulated the possible outcome if the Patent has been amended or revoked after the damages order has been formally passed and entered, but before the damages have been paid. In this situation, he suspected that the only course would be to seek to appeal against the award of damages, relying on the amendment or revocation as new evidence, since there would be an applicable estoppel arising from the damages order. And once the damages have been paid, Lord Neuberger suggested that an alleged infringer would have to try and raise a restitutionary claim if it wished to recover the damages on the ground that the patent had been revoked or varied. He expressed no view on the strength of such a claim, which he noted may well be highly dependent on the facts of the particular case.

We therefore await the first bold litigant seeking repayment of damages.

Relationship between national proceedings and EPO proceedings

The problems illustrated by these cases arise from the parallel nature of proceedings in the EPO.

According to Lord Sumption, any ‘vexation’ associated with the pursuit of two sets of validity proceedings was an inescapable feature of the statutory scheme which conferred concurrent jurisdiction on both the English court and the EPO. In the previous case law, especially judgments of Lord Justice Jacob, preference had been given to whichever forum reached its validity decision first, and the English court tended not to stay proceedings in favour of a parallel EPO opposition. This was said to be inherent in the system, and Jacob LJ had expressed himself as ‘not sorry’ about it, asserting that this was more conducive to certainty. But according to Lord Sumption,‘It can hardly be said that the vexation inherent in there being two perfectly proper proceedings concurrently is made more tolerable by ignoring the outcome of one of them.

His Lordship also pointed out that if an estoppel would have blocked the defendant from challenging the damages enquiry, that would have represented a very good reason to stay the English proceedings pending the EPO outcome. This contrasted with the guidance given by the Court of Appeal in Glaxo Group Ltd v Genentech Inc [2008] Bus LR 888, to the effect that the English court should normally refuse a stay of its own proceedings if it would be likely to resolve the question of validity significantly earlier than the EPO. Since the outcome in Virgin does not present a clear solution to other related problems, such as the possibility of revocation after a damages enquiry has proceeded, the Supreme Court has invited the Patents Court and Court of Appeal to re-examine the guidelines.

We can therefore expect a change in practice in the Patents Court, with better prospects of the court agreeing to stay proceedings in favour of a parallel EPO opposition. This may also lead to increased popularity for EPO oppositions, which in turn could further slow down the average time frame for EPO oppositions.

Comparison with related scenarios

For the avoidance of doubt, this decision does not affect the situation where, after an infringement decision, a second court finds that a different defendant’s identical product is non-infringing. That would not affect the first finding of infringement, since infringement decisions only bind the parties to each action, whereas validity decisions are‘in rem’ and affect all the world.

Clearly, one would not expect to pay for a licence under a non-existent patent. If, according to Lord Neuberger, it may be possible to recover damages paid in respect of a patent that is subsequently invalidated, is it also possible to claim restitution in respect of payments under licence? This is particularly illustrated, perhaps, by situations in which licences are agreed with so-called ‘patent trolls’ under threat of, or following, litigation. This will depend on the terms of the licence, but the situation is not analogous to that of a damages enquiry because arguably a licence confers economic benefits in the market, and royalties may have been reflected in the price to end-customers.

In disputes involving technical standards and associated ‘standards-essential patents’, where the patentee has committed to licences on fair, reasonable and non-discriminatory (‘FRAND’) terms, it is possible for the court to determine appropriate licence terms without first having determined validity or infringement. Whether the court does so depends on the willingness of the parties to accept a court-determined licence, and whether a preliminary decision on licence terms may avoid the need for costly patent litigation. In the recent High Court decision, Vringo Infrastructure, Inc. –v- ZTE (UK) Limited [2013] EWHC 1591 (Pat), the court declined to order a preliminary trial to establish FRAND licence terms, since the defendant was determined to contest validity and infringement. It was noted that if the court were to decide a global royalty, but later in the action invalidated the patents in suit, the royalty rate would not be binding on the defendant, since the latter would have established that it has no obligation to pay the patentee in this jurisdiction.

Finally, it is interesting to note that under the UK’s recently introduced ‘Patent Box’ tax incentive scheme, a claim to tax relief based on existence of a relevant patent will apparently not be reversed if the patent is subsequently invalidated, even though the effect of such invalidation under European patent laws is that the patent is deemed never to have existed. Paragraph 2.26 of the HMRC Technical Note and Guide explains that patent rights will qualify as the basis for relief ‘until such time as they cease to be protected’, although it does not acknowledge that patent revocation has retrospective effect under European patent laws. Invalidation of a patent by a court in enforcement proceedings will, according to HMRC, not necessitate a retrospective adjustment to Patent Box calculations, if the Patent Box claimant reasonably believed that it held qualifying rights. This will require clarification in practice.

Further Reading

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