Non-practicing Entities and the Unitary Patent Regime

Europe has debated and discussed the need for the unification and harmonization of national European patent systems for more than the past forty years. However recently, decisions regarding European patent harmonization, namely a proposed unitary patent regime, have greatly advanced.

In December 2012, the European Parliament voted positively in a first reading of the EU Council’s proposals for two draft regulations on a unitary patent for Europe, with the first draft regulating unitary patent protection (EU unitary patent), while the second draft regulation concerns translation arrangements for such protection.

The third and final component of the proposed “patent package” includes an international treaty, the Agreement on the Unified Patent Court (UPC). While the proposed regime has yet to be ratified by the required minimum of thirteen countries, including Great Britain, Germany, and France (France ratified the Agreement in March 2014,), expressed support for the introduction of the European patent package is based on wide acclaim in reducing the cost of patent protection in Europe, lessening the fragmented market for patents in Europe and the significant variations between national court systems, thus providing for more legal certainty and a more efficient system overall.

Subsequently, it is believed that the proposed regime will help increase Europe’s global competitiveness, innovativeness, and attract an increased amount of foreign investment.

However, many concerns remain regarding the implementation of the proposed unitary patent regime, not least including one heard from both industry and policymakers regarding the introduction of a (mostly) pan-European patent (mostly because it is still unclear whether Italy, Spain, Poland and Croatia will ultimately decide to participate in the new regime), attracting and facilitating the activities of non-practicing entities (NPEs) to the detriment of European competitiveness and innovativeness, and thereby reversing many of the benefits which the proposed regime seeks to achieve.

NPEs Focus on Licensing

NPEs are generally described as individuals and/or entities that build business models solely around the licensing and enforcement of patent rights. Typically, NPEs do not manufacture products or use patent rights for research purposes, but rather focus mainly on building licensing campaigns and managing licensing and enforcement aspects of patent rights. Some view these types of entities as a nuisance as they do not use patents in the traditional way of building products, but instead focus on patent licensing, and if necessary, patent litigations.

Currently, NPE operations tend to be mainly concentrated in the U.S. jurisdiction, where a larger and more unified patent marketplace exists, and where awarded patent infringement damages and settlement agreements may be substantial in comparison to other jurisdictions. Accordingly, under this presumption, it is useful to consider some of the ways in which the proposed unitary patent regime may influence such NPE activities in Europe taking into consideration the proposed regimes’ Agreement on a UPC and the preliminary set of provisions for the rules of procedure for the UPC.

Concerns regarding potentially heightened NPE activity under the proposed unitary patent regime mainly come from the increased leverage a (mostly) EU-wide patent right will provide. Two specific concerns focused on here rest largely on characteristics of patent litigation, being: injunctions, and the division of actions for patent infringement and counterclaims in which patent validity is contested, otherwise known as bifurcation.

Injunctions

Under the unitary patent regime, it will be possible for patent proprietors to essentially be granted (mostly) pan-European patent protection, and therefore also the possibility to obtain a (mostly) pan-European injunction. An injunction permits patent holders to ban unlicensed products containing the patented technology from the marketplace, which under the unitary patent will cover generally the whole of Europe as a single patent jurisdiction, an estimated market of approximately 500–700 million people.

This powerful economic and legal tool may be used by NPEs to their advantage in the enforcement of their patent rights to essentially increase their bargaining power by impeding (allegedly infringed) product sales across most of the EU region in order to negotiate greater licensing or settlement fees, or to hold-up manufacturers who are not willing to negotiate satis-factory licensing fees.

Theoretically, the threat of a (mostly) EU-wide injunction should promote settlement, which is what NPEs generally desire in order to generate revenues. Currently, the Agreement on a Unified Patent Court does not make clear when an injunction may or may not be granted. 

Bifurcation

Patent infringement cases often involve the related issues of whether the patent is valid, and if so, whether it has been infringed. In some European countries, for example Germany, it is common to separate these two issues, and under the proposed unitary patent regime, the Agreement on the UPC allows these two questions to be decided by different courts in the same case. There will be several divisions of the Court of First Instance; there will be local and regional court divisions, in addition to a central divisional court.

Infringement proceedings will generally be brought before the (local) division in which the infringement takes place or where the alleged infringer is located. If the alleged infringer counterclaims for revocation of the patent right, the local division handling the infringement action has the option of referring the counterclaim action to another divisional court – namely the central divisional court – thus resulting in the bifurcation of infringement and validity determinations, similar to that found in the German system.

NPEs therefore may be able to have a finding of infringement determined positively first before the question of validity is decided, thus allowing time for an injunction to be potentially granted barring products from most of the European market before deciding whether the patent contested is actually valid.

As such, NPEs appear to have several forum choices in which they may bring actions for infringement, choosing the most convenient for them or at least the most inconvenient for the alleged infringer. This again increases NPEs bargaining power to influence a favourable settlement agreement.

Business Opportunities in Europe

Despite some of these concerns regarding the possible increased presence of NPEs in Europe, if and when the proposed unitary patent regime is fully ratified and implemented, NPEs may also provide several opportunities for firms operating in Europe as well. NPEs may provide needed licensing, monetization and enforcement services to other entities that may lack these capabilities or the financial wherewithal to initiate.

They may provide compensation for inventors who only wish to sell their patent right, while such compensation may then fund that inventor to further innovate. They may also help to improve the patent marketplace in Europe by acting as an intermediary or right brokers in collecting patent rights in one place allowing easier access to finding the necessary rights needed to be licensed, buying and selling patent rights, and making use of underutilized patent rights, potentially raising the value of European patents and investments in European firms.

While it remains to be seen if and when the proposed unitary patent regime will actually be realized, it is nonetheless important for European firms and those firms with European counterparts in their patent portfolios to be aware of NPEs and their evolving business models and to take into consideration the possibility of an increased presence of NPE activity in Europe under the proposed unitary patent regime and how this may potentially impact one’s intellectual property strategies and business operations, if at all.

Kelli Larson
PhD Candidate, Commercial Law
Hanken School of Economics

The Patent Package

Regulation (EU) No 1257/2012 of the European Parliament and of the council of 17 December 2012 implementing enhanced cooperation in the area of the creation of unitary patent protection.

Council Regulation (EU) No 1260/2012 of 17 December 2012 implementing enhanced cooperation in the area of the creation of unitary patent protection with regard to the applicable translation arrangements.

Agreement on the Unified Patent Court, Document No. 1635/12 (11 January 2013).