In its decision of 28 July 2016, the Court of Justice of the European Union (“CJEU”) clarified that at least a significant and appropriate part of the reasonable costs incurred by the successful party must be reimbursed by the unsuccessful party in IP litigation. Therefore, national legislation that imposes a flat-rate reimbursement significantly below the average rate actually charged for the services of a lawyer in that Member State can not be upheld.
In its decision of 26 January 2015, the Court of Appeal of Antwerp, Belgium had requested a preliminary ruling from the CJEU regarding the interpretation of Article 14 of the Intellectual Property (IP) Enforcement Directive 2004/48/EC of 29 April 2004. Article 14 provides that reasonable and proportionate legal costs and other expenses incurred by the successful party shall be borne by the unsuccessful party in IP litigation, unless equity does not allow this.
Under Belgian law, the legal costs that the unsuccessful party must pay, comprise a capped flat-rate reimbursement of the costs and fees of the successful party’s lawyer, regardless of the actual costs and fees incurred by the successful party for the assistance of a lawyer in a specific case. The flat rates set by Belgian law vary between 165 euro (for claims up to 250 euro) and 16,500 euro (for claims over 1,000,000 euro) with a mark-down and mark-up mechanism for exceptional circumstances, which can double the amount due by the unsuccessful party. In most cases and certainly in complex IP cases, these amounts only cover part of the successful party’s legal fees. Moreover, the Belgian system not only caps the reimbursement of the lawyer’s fees, but awards expenses for the assistance of other technical advisers only when the other party is at fault.
In the underlying case (a patent case), the first court awarded the winning defendant just 11,000 euro in legal fees for the proceedings at first instance and denied its request for compensation for the costs of its technical adviser, despite the defendant’s assertion of actual legal fees of 185,462 euro and a technical adviser fee of 44,400 euro.
In those circumstances, the Antwerp Court of Appeal decided to stay the proceedings and refer the following questions to the CJEU for a preliminary ruling:
- Do the terms “reasonable and proportionate legal costs and other expenses” in Article 14 of Directive 2004/48 preclude Belgian legislation which offers courts the possibility of taking into account certain well-defined features specific to the case and which provides for a system of varying flat rates in respect of costs for the assistance of a lawyer?
- Do the terms “reasonable and proportionate legal costs” and “other expenses” in Article 14 of Directive 2004/48 preclude case law which states that the costs of a technical adviser are recoverable only in the event of fault (contractual or extra-contractual)?
In its decision of 28 July 2016 (C-57/15), the CJEU considered the following regarding the first question:
- Legislation providing for a flat-rate reimbursement of a lawyer’s fees could, in principle, be justified, provided that it is intended to ensure the reasonableness of the costs to be reimbursed, taking into account factors such as the subject matter of the proceedings, the sum involved or the work to be carried out to represent the client concerned.
- On the other hand, the requirement that the unsuccessful party must bear ‘reasonable’ legal costs cannot justify, for the purposes of the implementation of Article 14 of the IP Enforcement Directive, legislation imposing a flat rate significantly below the average rate actually charged for the services of a lawyer in that Member State.
- Such legislation compromises the principal aim under the IP Enforcement Directive of ensuring a high level of protection of intellectual property rights in the internal market, an aim expressly mentioned in recital 10 to that directive, in accordance with Article 17(2) of the Charter of Fundamental Rights of the European Union.
- Moreover, Article 14 of the IP Enforcement Directive provides that the legal costs to be paid by the unsuccessful party must be ‘proportionate’. The question of whether those costs are proportionate cannot be assessed independently of the costs that the successful party actually incurred in respect of the assistance of a lawyer. If the requirement of proportionality does not imply that the unsuccessful party must necessarily reimburse the entirety of the costs incurred by the other party, it does however mean that the successful party should have the right to reimbursement of, at the very least, a significant and appropriate part of the reasonable costs actually incurred by that party.
- Therefore, national legislation that lays down an absolute limit in respect of costs attached to the assistance of a lawyer must ensure, on the one hand, that that limit reflects the reality of the rates charged for the services of a lawyer in the field of intellectual property, and, on the other, that, at the very least, a significant and appropriate part of the reasonable costs actually incurred by the successful party are borne by the unsuccessful party.
Hence, the answer to the first question is that Article 14 must be interpreted as not precluding national legislation to provide for a flat-rate scheme for the reimbursement of costs for the assistance of a lawyer, subject to the condition that those rates ensure that the costs to be borne by the unsuccessful party are reasonable, which it is for the referring court to determine. However, Article 14 precludes national legislation providing flat rates which, owing to the maximum amounts that it contains being too low, do not ensure that, at the very least, a significant and appropriate part of the reasonable costs incurred by the successful party are borne by the unsuccessful party.
Thus, to summarize, flat rates are acceptable as long as they compensate for “a significant and appropriate part of the reasonable costs” actually incurred.
With regard to the second question, the CJEU considered the link between those ‘other’ costs and the legal action. If those costs, such as the costs of a technical adviser, are directly and closely linked to a judicial action seeking to have the IP rights upheld in a specific case, then they should be reimbursed. However, more general costs, such as the costs of research and identification incurred in the context of a general observation of the market in order to determine possible IP infringements, attributable to unknown infringers at that stage, do not appear to show such a close direct link.
Although it is still too early to predict how this CJEU decision will be transposed in Belgian legislation and/or case law on reimbursement of a lawyer’s fees, it goes without saying that it is a ground-breaking decision for all involved in IP litigation, not only in Belgium, but in all of the EU. In Belgium, we would certainly advise parties in IP litigation to claim the actual costs incurred if these are significantly higher than the current applicable flat rates. At the same time, this decision could raise a number of other questions in Belgium, such as whether different cost recovery rules for IP litigation versus other litigation is discriminatory and thus contrary to the Constitution.