The article was first published on the Fall issue of International Law News, December 2018

If you’ve missed the fall issue of ABA’s International Law News, you may want to read up Liz Cohen’s view of the future of the Unified Patent Court. Liz says that despite the uncertainty about the start of the UPC, businesses and attorneys should start preparing.

Enforcing patents throughout Europe is likely about to change with the Unitary Patent (UP) system and the forthcoming Unified Patent Court (UPC). This new approach will allow inventors and companies to apply for and obtain patent protection through a single procedure and then enforce their rights through a pan‑European court. Currently, national and European patents are enforced in national courts. The new unitary system aims to simplify registration and renewal procedures, provide broad geographic patent protections, reduce direct and indirect costs, and end the need for parallel litigation. As such, companies could see significant reductions in their patent acquisition, maintenance, and enforcement costs for their crossborder and international patent portfolios.

The UPC, which is expected to start receiving cases in 2019, will have exclusive jurisdiction for future unitary patents and will provide a single-point mechanism for patent enforcement. The scope of patent protections and remedies for infringement will be valid in European Union (EU) countries that have ratified the UPC Agreement. Sixteen countries have ratified the agreement, including France and the United Kingdom as two of the three countries required because they have the most patents in force. The timeline now depends on ratification by Germany, as the remaining required country, with this in turn being dependent upon the timing and result of a constitutional challenge brought in March 2017, which is due for resolution later in 2018.

The impacts of Brexit are a few months away, and it now seems unlikely that the UPC will start operations before Brexit comes into effect on March 29, 2019. The United Kingdom is negotiating with the EU to enter into a Brexit treaty with a transition period, also referred to as an implementation period, which would mean that the UK would be able to participate in the UPC system during the transition/implementation period at least through the end of 2020. As a backup, the United Kingdom is continuing to explore a “no deal” scenario to join the UPC in any event following German ratification.

This article provides an overview of the new patent system and the court, how it would affect future and existing European patents, and why businesses and attorneys should prepare now.

The article is related to a panel program that I chaired on patent litigation at the ABA Section of International Law Life Sciences Conference held June 10-12, 2018 in Scandic, Copenhagen. The panel featured Alexander Ramsay, the Chair of the Unified Patent Court Preparatory Committee; Ettie-Ann Alder, a Senior Patent Attorney at Ericsson; and Nicolaj Bording, a Partner at Kromann Reumert.

What Is the Unified Patent Court?

The UPC represents the next stage for patent protections in Europe. Configured as an international court established by treaty, its specialized, one-stop-shop for patent litigation will offer an alternative to enforcing or challenging patents in national courts. Central divisions will be located in Paris, Munich, and London, with additional local and regional divisions in various cities. The Court of Appeal will be located in Luxembourg. It is anticipated that parties will bring their infringement cases to the division where infringement occurred or where the defendant is domiciled; however, in many cases, parties will be able to choose where to bring the action. Cases will be litigated before a multinational panel of judges according to a blended procedural regime based on aspects of legal traditions from across Europe’s civil and common law systems.

EU countries are not required to participate in the UPC, but the major patent markets of France, Germany, and the United Kingdom are all mandatory participants under the UPC Agreement signed in 2013; therefore, ratification by all three countries is a necessary precursor of the system starting. Inventors and companies will have the option for future patents to be granted as a unitary right covering a subset of countries and including these major markets. Companies will want to monitor and consider which countries are participating. Conventional, also referred to as “classical,” European patents will still be available to cover the remaining EU countries outside the unitary system and the UPC, such as Switzerland.

As of September 2018, sixteen EU countries had submitted their ratifications of the UPC Agreement: Austria, Belgium, Bulgaria, Denmark, Estonia, Finland, France, Italy, Lithuania, Luxembourg, Latvia, Malta, the Netherlands, Portugal, Sweden, and the United Kingdom. Additional countries are expected to ratify or accede to the UPC Agreement.

When Is the UPC System Likely to Start?

Whether the Court will open for business in the first half of 2019 or later depends on the timeline of Germany’s ratification of the UPC Agreement. When and whether Germany will be able to ratify the UPC Agreement depends on a ruling by the German Federal Constitutional Court (Bundesverfassungsgeright, BVerfG) responsive to a constitutional complaint against Germany’s ratification filed by a German lawyer in March 2017. The Court has listed the case for hearing in 2018. If, as many commentators expect, the Constitutional Court rules that the complaint is inadmissible or is otherwise is rejected in short order on substantive grounds, Germany will be able to complete its ratification process. If any part of the complaint is admissible and not dismissed rapidly, then the case will probably proceed to a substantive hearing, further delaying the process, albeit hopefully the listing of the case for hearing in 2018 indicates an intention to decide the case relatively soon. Further, the consensus view among commentators is that, even if the complaint is held admissible in whole or in part, it will nonetheless most likely fail; or, if upheld, a constitutional “fix” may be possible such that the project will not be derailed. If so, the question is one of timing and whether the political will for the project to succeed will remain strong enough for the system to go ahead notwithstanding the delay. At present, industry support and the political will in Germany to support the UPC show no sign of diminishing.

The UPC Agreement has a Protocol on Provisional Application to allow parts of the UPC Agreement to be applied early to support the logistical start of the UPC system, such as recruiting judges and staff. The provisional phase is expected to last roughly six to eight months, but again its start is dependent on Germany which cannot approve this Protocol until the constitutional complaint is resolved.

How Will It Affect Existing European Patents?

Existing European patents will automatically come under the jurisdiction of the UPC, subject to complex arrangements that allow for “opting out” during a seven-year transitional period. As such, the UPC will have a very important retrospective effect for those European patents in force in countries participating in the UPC. Now is the time to consider the full implications for opting out existing European patents, bearing in mind that there are advantages to opting out before the UPC opens and that considerable due diligence may be required.

Article 83(3) of the UPC Agreement will allow European patent holders to opt out of the UPC during the transition period and, thus, preserve their ability to litigate only in national courts. Where a patent is owned by two or more proprietors, all proprietors must submit an opt-out demand. Opting-out could be useful as a strategy to prevent broad blocking actions or central revocation. Even if the right to opt-out is invoked under Article 83(4), European patent holders can withdraw their opt-out demand if there have been no national actions. If opt-out is not invoked during the transition period, both the UPC and national courts will have jurisdiction for cases brought by the patent holder or a potential defendant. Thus, inaction opens the door for everyone, not just the patent holder, to make the jurisdictional choice. This could result in “torpedo” actions, where a pre-emptive action is started in one court—in this case, a national court—so as to prevent the patentee starting a pan-European action in the UPC.

The new unitary system builds on the current operations of the European Patent Office (EPO) and its function to grant and revoke, in post-grant opposition proceedings, European patents. The EPO will continue to serve a vital role in the overall patent system, including these opposition proceedings. Notably, under Article 33(10) of the UPC Agreement, UPC judges will be able to request accelerated opposition proceedings before the EPO when relevant to UPC cases and to choose to continue with UPC proceedings despite any ongoing opposition.

Variations in the UPC divisions may help inform where to bring a case. Considerations could include the dominant language used in cases; nuanced procedural differences despite the uniform rules, similar to differences seen in U.S. District Courts; the nationalities of the judges; and the track records for preliminary injunctions and final injunctive relief.

Why Should Businesses Prepare Now?

There are a number of reasons why it is wise to prepare now for the new patent system and the UPC.

Companies should consider how the UPC might influence their patent portfolios and long-term patent strategies. For example, companies need to be aware of and prepared for the possibility, which could be significant, of being sued in the UPC by competitors and/or non-practicing entities (NPEs). In the case of NPEs, the lack of track record in the early years may cause nervousness among defendants. Similarly, the projected time to trial of only twelve months in the UPC, the likelihood of relatively modest costs to take a case to trial, and the likelihood that final injunctions will be granted in almost all cases—certainly with no eBay-type rule and its four-factor injunction test— may all contribute to significant early NPE activity. The risk of injunctions having broad geographic effect could influence long-term investment decisions, such as where to locate research and development activities, manufacturing facilities, laboratories, and product development and testing activities. Furthermore, the increased risks could impact and shift cooperation with universities, joint ventures, and start-ups. In the category of opportunity, even though the UPC does not cover all EU countries, centralized UPC revocation actions may be a cost-effective and potentially powerful alternative and/or additional way to attack competitors’ patents.

A particular issue for patent litigation is how to balance the usefulness of central enforcement with the potential for central revocation and, hence, the loss in one action of a very valuable asset, bearing in mind the lack of track record of the newly created UPC. Making the right decisions requires considering several issues. Will the UPC have enough experienced judges to be a reliable forum of choice for litigants? If there are doubts, should patent owners delay using unitary patents and the UPC for existing and future patents for so long as they can, such as during the seven-year transition period after start-up, to avoid those early-adopter risks? Are the benefits of the costs savings greater than the risks of the new system? If patent holders within key sectors avoid the new system in its formative years, will other sectors do likewise? If so, will specific sectors dominate the UPC case law to the potential long-term detriment of those other sectors that chose to wait for the UPC to mature?

Individual inventors, small- and medium-sized companies, academic institutions, and nonprofit organizations should carefully consider the implications of the unitary patent and identify their plans of actions for future patenting strategies. These entities should review and update licensing, joint venture, and collaboration agreements. Importantly, these entities should consider whether obtaining broad patent coverage at the lowest possible price through unitary protection might prejudice their licensing prospects.

If the United Kingdom cannot participate after Brexit or if a transition/implementation period only extends through 2020, will the unitary patent and the UPC remain attractive options? Further, given the reliance on common law aspects of the new system, will those aspects be maintained in the absence of U.K. judges in the UPC?

While configured to have multiple divisions, the UPC will be a single court, and each division will be capable of giving UPC-zone-wide decisions. Will nuanced differences in approaches in these divisions lead to an uneven distribution of patent lawsuits across those divisions? If so, will we see the emergence of a European equivalent to the Eastern District of Texas? Might the sheer size of the market covered by the UPC and its specialized nature lead to a shift in the global forum of choice?

Why Should Attorneys Prepare Now?

Attorneys can make good use of the current delay by helping their clients understand the potential unitary patent system, how the new system might affect patenting and enforcement strategies, and what practical preparations are needed to take full advantage of timing and licensing prospects. In particular, they can advise clients on the question of whether for the particular businesses concerned, opting out some or all existing patents in their portfolio is a sensible strategy. If so, preparations should be taken to ensure that the opt-out process can be completed during the provisional phase, during the so-called “sunrise period” between ratification by Germany and the opening of the Court, on which day, of course, would-be defendants can proactively revoke any non-opted out patents. Even if the decision is to opt out all one’s patents, there is still a need to learn about the UPC and its system because adversaries, whether competitors or NPEs, may choose not to opt out their patents and sue in the new UPC. After all, even if it has not been cost-effective for some patentees to sue in individual European courts to date, the increased market size the UPC covers may completely change the equation, and UPC litigation may become a very attractive new option.