EP vs UP – a research project
The patent system in Europe is both highly fragmented and costly. Since the mid-1970s, the European Patent Office (EPO) has offered patent protection in multiple Member States via European Patents (EPs). EPs are granted through a centralised examination procedure but are validated and enforced separately in each Member State. Expected for the beginning of 2022, a new patent protection should be introduced in Europe, called the European Patent with unitary effect or the Unitary Patent (UP). This major institutional change aims to provide a uniform framework to enforce patents in Europe with the payment of a single renewal fee to protect an invention in all Member States. This simplified procedure will reduce the cost of patenting in Europe. Nevertheless, little is known about how firms and consumers will be affected by this new patent regime.
Toward a harmonization of the European patent system
Over the past 40 years the European patent system has seen increased integration and harmonisation. In 1973, the European Patent Convention (EPC) created the European Patent Office (EPO). The EPO provides a legal framework for the granting of European patents (EPs). In 1978, only seven Member States were contracting States and 3,572 patents were filed. Today, 38 countries are contracting States and around 150,000 European patent applications are filed every year. An EP has a single harmonised application and granting procedure but remains essentially a bundle of national patents which offer protection for the same invention in multiple Member States. In particular, an EP is subject to national patent laws, including the payment of renewal fees in States where the patent is in force. Therefore, the terminology “European” is misleading because the European dimension is only at the examination of the patent application. The fragmented and complex post-grant procedure results in a more expensive patent system than in the US or in Japan as shown by Van Pottelsberghe de la Potterie (2010).
The implementation of a real European patent with a centralised post-grant procedure has remained elusive until recently. The new UP system is finally expected to be introduced at the beginning of 2022, allowing for a single harmonised post-grant procedure. Note that there is still some uncertainty regarding the timing of the implementation of the Unitary Patent System and the Unified Patent Court. The centralised pre-grant phase will remain the same under the new regime. In other words, there will not be any difference in the quality of search and examination conducted by the EPO for EPs and UPs. The difference with the EP will be in the post grant procedure with the introduction of a single procedure, currency, deadline and no obligation to use a representative. Therefore, it will significantly decrease the cost of patenting compared to the EP because the renewal fees will be paid to a single organisation and at a lower level. According to the EPO, it costs 170,000 euros to obtain an EP for ten years in 25 countries, whereas it will cost only approximately 35,000 euros with a UP on the same coverage. In the long run, a UP will not require the translation of the patent which is another reason for the high cost of EP. The UP will become an additional option alongside the current national patents and EPs.
The new regime is also linked to the creation of the Unified Patent Court (UPC). The UPC will have jurisdiction over both EPs and UPs. The creation of the UPC will affect the costs of litigation as it will provide a unified Court to centralise litigation. More likely, the creation of the Court will affect the incentives to innovate
The ratification of the Unitary Patent and Unitary Patent Court is currently being reviewed by the German Federal Constitutional Court which has created a further delay in the start of the UP system. Once implemented, the UP will give a protection in up to 26 Member States which have ratified the Agreement. According to the EPO, it is very likely that more countries will join the new system in the following years.
Economics of the Unitary Patent
In the UP regime, the annual renewal fees are unique and the UP covers de facto the full set of Member States. Because the patentees will be given the option to apply for a UP instead of a country-specific EPs, the introduction of the UP can only increase the value of patents. The changes in private value can be decomposed in four effects: a cost-efficiency effect, a length effect, a territorial scope effect and an extensive margin effect with an increase in the number of patented inventions.
A direct effect of the UP is a reduction in the cost of patenting. More specifically, the more countries in which a classic EP would have been validated, the more cost-effective a UP will be. For large companies that usually validate their EPs in many States, the UP may provide cost-efficiency. Alternatively, some patent holders prefer to renew their EPs in only a small subset of States, for instance only in the Nordic countries. For them, the UP might not appear as a preferable option. Under the new regime, some patents will be renewed longer whereas others will be renewed for a shorter time which is the length effect. The territorial scope of the patent increases because the UP covers all States signing the Agreement. In the current European Patent System, companies can always reduce the territorial scope of protection by letting their patents lapse in some countries. In the UP regime, a country-specific lapsing decision will not be available, and the lapsing decision will affect the whole set of countries. At the extensive margin, new inventions that would not be applied for protection or would not be validated under the current system will be introduced. These changes will not only affect the patents that would be applied for under the current EP but could also increase incentives to invent. At the same time, by making patent protection more cost effective, the UP will enhance the propensity to patent and may hence worsen the functioning of the patent system by increasing the number of patents per R&D euro. Moreover, under the new regime, some inventions of low value will be now protected by patents.
Our research project
The goal of the research project started with Otto Toivanen and Tuomas Takalo is to assess the costs and benefits of the upcoming Unitary Patent.
To evaluate the expected effects of the UP system, we plan to develop and estimate a dynamic model of renewal decisions for EPs granted to applicants in different technological areas. The model borrows from the literature on patent renewal following the approach of Pakes (1986) and Lanjouw (1998). In these models, the renewal decision is an optimizing process balancing the renewal costs with the expected returns generated by the patent. For each period, the patent owner has to decide whether to pay a renewal fee to keep the patent in force or to let it lapse. Based on these decisions, we can infer a distribution for the private value of patents.
We will then use the estimates to quantify the effects of the UP on the private value of patents as well as the social value. In other words, we want to assess what would be the coverage, the length and the number of inventions patented if the patent owners had the choice to apply for a UP.
Cover photo: USGS, Unsplash