First published on Landslide, Vol. 15, No. 1, September/October 2022, by the American Bar Association.
Europe is on the cusp of one of the most significant developments in patent law practice since the European Patent Office (EPO) was established under the 1973 European Patent Convention (EPC).1 The EPC is a multilateral treaty that established a common system for the grant of patents in Europe, greatly simplifying the prosecution process by using the EPO as a single office to grant a bundle of patents for countries of the applicant’s choosing via the examination of a single application. Europe now stands on the threshold of another common system established under a multilateral treaty. This time, the subject matter is not prosecution but litigation. The Unified Patent Court Agreement (UPCA),2 signed in 2013, provides for a single court, the Unified Patent Court (UPC), having the power to determine disputes on the validity and infringement of patents for all participating countries. Naturally, with pharmaceuticals being one of the most hard-fought areas within patent litigation, pharma companies are gearing up to deal with the new system. This article covers the essentials of what pharma companies need to know.
What Is the UPC?
The Unified Patent Court is a third system in Europe for resolving patent disputes. Europe already has two systems: (1) national litigation systems, within which infringement and validity can be determined on a country-by-country basis; and (2) the EPO system, within which post-grant oppositions can determine the validity of all country patents within the bundle granted by the EPO. Uniquely, the UPC is the first system within which both infringement and validity can be resolved in one case for multiple countries.
The operation of the UPC is governed by the UPCA, a multilateral treaty between certain member states of the European Union. When signed in 2013, 25 of Europe’s then 28 member states participated (all countries except Spain, Poland, and Croatia). Since that time, the United Kingdom has left Europe, and the number of participating countries now stands at 24. However, not all 24 counties have yet ratified the UPCA, which adds a layer of complexity to the geographic coverage of the system. Upon start-up, at least 17 of the 24 countries will have ratified the UPCA (presently, all but Cyprus, Czechia, Greece, Hungary, Ireland, Romania, and Slovakia). In the early years, the size of the system will grow as the other countries join. Precisely when that will happen is unclear. Hence early users of the system will still have to litigate nationally in several countries as well as in the UPC if they want to cover the whole of Europe.
The objectives of the UPC can be gleaned from the recitals of the UPCA. These indicate that in Europe, “the fragmented market for patents and the significant variations between national court systems are detrimental for innovation, in particular for small and medium-sized enterprises which have difficulties to enforce their patents and to defend themselves against unfounded claims and claims relating to patents which should be revoked.”3 The contracting member states therefore wish “to improve the enforcement of patents and the defence against unfounded claims and patents which should be revoked and to enhance legal certainty by setting up a Unified Patent Court for litigation relating to the infringement and validity of patents.”4 From these a theme emerges: that the UPC will redress the imbalance in power suffered by small companies that previously struggled to enforce patents and to defend themselves against unmeritorious claims across a patchwork of national systems. Hence we begin to see that the system may not be a natural fit for the interests of large pharma companies. Although the UPC will enable a Pan-European infringement action (and Pan-European permanent injunction and damages award for a victorious patentee), it also brings with it the risk of a Pan-European revocation action.
The UPC is actually only one of two new systems. The other new system concerns a new type of patent for Europe, called the unitary patent (UP). Just as the UPC brings a third system for dispute resolution, the UP brings a third system for patent protection, alongside the existing two systems of national patents (country patents granted by national patent offices) and European patents (country patents granted by the EPO). However, unlike the existing systems of individual country patents, the UP covers more than one country: it covers potentially all countries participating in the Unitary Patent Regulation5 (all European member states except Spain and Croatia). Like the UPC, the geographic scope is not yet fixed and will continue to grow with time, the reason being that the UP will only cover participating countries that have also ratified the UPCA. Hence the geographic scope of the UP is likely to be 17 countries at the date of start-up of the new system. Until the system is fully formed, careful account must be taken of the number of participating countries when assessing the extent of protection or freedom to operate across Europe.
Concerned that the new system may not be widely used if the operation of the UPC was confined to UPs, it was decided that for a transitional period of seven years (potentially extensible to 14 years), existing European patents would fall within the system by default unless opted out.6 After seven (or 14) years, the system will deal only with UPs. This point is perhaps the single most important consideration for pharma companies, which tend to rely on a smaller number of more valuable patents than high-tech industries. If the “crown jewels” are not opted out, the protection across Europe could be killed with a single bullet: the UPC revocation action.
What Can the UPC Do?
The UPC will be able to handle most but not all of the issues that typically arise in patent litigation.7 Certainly, revocation actions and infringement actions will form the staple diet of the new system, the latter also including actions for declarations of noninfringement. Actions may be brought by way of initial claim or defensive counterclaim. The UPC will also have competence to order preliminary injunctions and other provisional measures, such as orders for seizure of evidence of infringement, and to grant final relief in the form of damages and permanent injunctions. The UPC will be able to handle claims relating to prior use and, in the context of UPs, will also be able to decide upon so-called “licenses of right” (where the patentee files a statement with the patent office that any person may apply for a license in return for appropriate compensation). Challenges to administrative decisions of the EPO can also be made in the UPC—for example, decisions on requests for unitary effect when applying for grant.
However, the UPC will not be able to do everything that a national court can do. National courts must still be used if the dispute involves issues of ownership or entitlement to grant, employee-inventor claims for remuneration, and claims for declarations on matters that go beyond straight noninfringement or invalidity—for example, declarations relating to essentiality of a standard or clearance declarations that a product belongs in the state of the art at a particular date (so-called “Arrow declarations”).
Pharma companies should take note that the UPC will also be competent to deal with disputes involving the validity and infringement of supplementary protection certificates (SPCs), term extensions of patents protecting pharmaceutical products. The nature of an SPC is that it is a sui generis national right, applicable to each country in which the owner has sought protection, provided there is a marketing authorization and patent protection for that country. The UPC presents the possibility for the first time that the validity or infringement of SPCs across Europe may be challenged in a single action. Of course, given that SPC protection is usually based on a patent fundamental to the protection of the pharmaceutical product (e.g., a patent for the molecule), owners of SPCs based on existing European patents will almost certainly choose to opt them out of the UPC system. The rules on opting out apply equally to SPCs as they do to European patents. The system has not yet advanced to the point at which unitary SPCs are available for UPs, and there are inherent difficulties with the concept, given that not all marketing authorizations are centrally applicable across Europe, meaning that a patchwork of authorizations can exist. Nevertheless, the European Commission has recently completed a consultation on the subject.8
From an enforcement perspective, pharma companies will be interested in the ability of the UPC to grant Pan-European preliminary injunctions (PIs) to restrain infringement. Presently, European case law9 permits cross-border PIs only in unusual circumstances in which an infringer based in the country of the court deciding the matter is also involved with the infringing activity committed by a foreign defendant in the other (typically few) countries. The Dutch courts are more or less alone in Europe in entertaining this type of case. The UPC will make PIs across all participating countries commonplace. This is a great prize for patent owners. However, it may also come with a high price. The rules indicate that the successful applicant for a PI may need to provide security to pay compensation if it later turns out at trial that the PI was not justified (because the patent is found either invalid or not infringed).10 Such a requirement is mandatory if the PI is granted ex parte. The payout to a competitor kept out of a lucrative market in 17 countries could be ruinous. One of the uncertainties of the new system is the extent to which a patent owner may be able to enforce the PI selectively in this situation, choosing only certain markets in which to block the competitor.
In procedural terms, the UPC system presents an amalgam of features taken from the national systems from both civil law and common law traditions. The Rules of Procedure, formally adopted by the UPC Administrative Committee on July 8, 2022,11 include provisions for French-style saisie-contrefaçon seizures of evidence as well as rules on disclosure (discovery) of documents and cross-examination of witnesses, which will add a distinctly common law flavor to the proceedings. However, what really matters is how the procedural rules are interpreted by the court, and in this regard, the role of the judge-rapporteur, essentially the case-handling judge, and their country background, is expected to be highly influential. Pharma companies looking at the Rules of Procedure will gain the impression that the UPC system has the potential to offer a more thorough evaluation of the facts of a case than might be available in traditional civil law jurisdictions. Without generalizing too broadly, this could make life more difficult for owners of weak patents or infringers without good defenses.
The UPC will not operate in isolation and, crucially, for existing European patents during the transitional period of at least seven years, will operate in parallel with national courts. This opens up significant opportunities for litigation strategy based around the decision to opt out patents from the UPC (confining them to national systems) and opt patents back into the UPC system (by withdrawing the opt-out and reengaging the parallel jurisdiction). The transitional provisions of the UPCA are such that once an action is started nationally, that patent cannot be litigated in the UPC,12 raising the possibility of national actions designed to torpedo the jurisdiction of the UPC. The EPO system of post-grant oppositions will also operate in parallel with national systems (as it does at present) and with the UPC. In much the same way as national courts do at present, the UPC will have the ability to stay litigation concerning a European patent if a decision on the validity of that patent is expected imminently from the EPO.
Pros and Cons of the UPC for Pharma Companies
The unique dynamics of patent litigation concerning pharmaceutical products call into consideration a number of pros and cons relating to the UPC system. Typically, pharmaceutical cases are characterized by high value, high technical complexity, near-complete country coverage across Europe, aggressive competition, and a relatively small number of patents relating to each product (at least for small molecules, which tend not to be surrounded by the large number of patents that can often accompany biologic products). What is the place of the UPC in such a landscape?
Clearly, there are attractions. The enforcement benefits for patent holders are seductive—the ability to sue centrally for infringement across Europe and obtain both Pan-European PIs and final injunctions with a single action. Not only does this present an enormous cost savings compared to litigating everywhere, but it also brings a large deterrent effect against competitors contemplating launch.
But are those benefits as good as they look? We have already mentioned that a Pan-European PI may come with a high price tag in the form of a guarantee in damages. Although the guarantee is discretionary in inter partes cases, and hence much may depend on the country background of the judges, many legal systems in Europe have a tradition of compensation for wrongfully granted PIs.
What about costs? This is one of the most frequently asked questions about the new system. Any lawyer will answer that this depends upon the amount of work done, reflecting the importance of the case. But a glimpse of the sums possible comes from the scale of recoverable costs under the “loser pays” provisions in the rules, which set a ceiling on recoverability in the most valuable case (worth more than EUR 50 million) of “up to EUR 2 million” (lower sums being recoverable in lower-value proceedings but always in the region of 5%–10% of case value) on the normal scale, potentially rising to “up to EUR 5 million,” where a case of the highest value is also accompanied by particular complexity.13
In many litigation systems, the fees recoverable are often only part of the fees actually spent. Hence it seems realistic to say that a large pharma case could cost many millions of euro. How do these features stack up against the present system? It is not uncommon for a Pan-European Union settlement to be reached after one or two country cases give the parties a sense of the prevailing outcome. Ironically, there will be cases where this settlement-based approach may be preferred for being cheaper, providing lower exposure to injunction or guarantee and greater long-term certainty (assuming that any UPC first instance decision will be appealed).
Pharma companies with patents to assert will also be mindful of some evident downsides to the UPC system. The risk of central revocation has already been mentioned, as has the exposure under a potential financial guarantee securing a geographically broad PI. But there are other more subtle considerations that may give rise to concerns. The quality of the judges is uncertain and only as good as the quality of the country legal systems from which the judges come. Not all countries in Europe are equal when it comes to experience of patent litigation cases. UPC court benches will be of mixed composition, with local influence depending on the volume of cases typically heard in that country (fewer cases meaning less local influence). Another downside comes with the likelihood that almost everything may be appealed in the early years of the system, where precedents have not yet become established. This includes procedural decisions as well as decisions on the merits of a case. Although the objective of the UPC system is to deliver decisions within 12 months, many practitioners remain doubtful as to whether this can be achieved.
The need to establish precedents favorable to the interests of pharma companies is a reason to participate in the UPC system. For example, the balancing of interests on a PI application is very different in the high-tech sector compared with the pharmaceutical sector. If pharma companies want reliable and well-informed decisions in future years, they must participate in the system from the beginning. Patent owners of any description may also take comfort from history, which tends to show that all new courts are inclined to be slightly pro-patentee in their first few years. To be otherwise is bad for business.
What Decisions Are Needed?
Right now, even before the commencement of the three-month “sunrise” period immediately preceding system launch, there are decisions to be taken by pharma companies as potential users of the system.
On patent prosecution, is it worth electing for unitary protection? As well as the obvious consideration of spreading litigation risk and giving flexibility as to ligation strategy based around opt-outs, there is cost to consider. The filing fees for unitary protection will be roughly equivalent to three or four countries, offering significant savings to companies that designate widely. But “pruning” of the portfolio is not possible for the UP, meaning renewal fees will remain at the same level throughout the patent term.
For existing European patents, should owners opt them out of the system? This decision is very likely to depend on the nature of the patent under consideration. “Crown jewel” patents protecting the active substance per se will inevitably be opted out. Whether lesser pharma patents, such as those protecting formulations, manufacturing processes, dosage regimens, and medical use, should be opted out of the system or kept in will depend on a number of factors, including the overlap in term of protection, overlap in subject matter protection, perceived strength, and likelihood of infringement (including technical ease of testing for infringement). Other considerations include whether the patent has already been the target of a post-grant opposition at the EPO (a good indication that it is considered to be an obstacle by competitors) and whether the patent is presently generating licensing income, in which case the risk of central revocation impacts not only on protection but also on existing financial revenue. Opt-out requests cannot be filed until the sunrise period begins, but the complexities of the opt-out decision are such that pharma companies are well advised to begin their deliberations now.
Contracts dealing with licenses, collaborations, and co-ownership should be checked for compliance with the regime. The ramifications of noncompliance may be significant. For example, only proprietors of European patents, not licensees (exclusive or otherwise), will be entitled to request opt-out, and to be effective, all proprietors must act together. Furthermore, applications to opt out must be made by the true proprietors, which will not necessarily be the registered proprietors.14 Hence investigations into ownership may need to be made. Yet further, different European country patents may be owned by different proprietors, and to be effective, opt-out requests must be made by all proprietors of all relevant designations. Co-ownership agreements should provide for decisions on grant as to whether unitary effect is chosen, that cooperation will be available on the opting out decision, and that the co-owners will also cooperate upon potential enforcement in the UPC system.
The gateway question of whether to litigate in the UPC may not be a simple “yes” or “no” decision but might rather be a case of “not now but maybe later.” As mentioned above, for existing European patents that are opted out, the jurisdiction of the UPC may be reengaged by withdrawing the opt-out decision, perhaps at a point in time at which infringement across Europe is imminent. But the freedom to reengage with the UPC (or, indeed, to engage in the first place) may be lost if, in the meantime, the patent has become embroiled in national litigation. Hence a national revocation action as a torpedo by a potential infringer who wishes to avoid a Pan-European injunction under that patent in the UPC is an attractive option—but only if proceedings in the UPC are not yet on foot. In such a scenario, a race to the courthouse may ensue.
The effectiveness of a torpedo action is actually open to doubt, owing to apparently conflicting provisions of the UPCA. On the one hand, the UPCA states that decisions of the UPC shall cover all contracting member states where the patent has effect (i.e., the entire patent bundle within the UPC countries (Article 34)). On the other hand, the UPCA also states that the UPC shall decide cases according to the requests of the parties and shall not award more than is requested (Article 76(1)). Hence there could be scope for enforcing only certain patents in the bundle (e.g., for three or four countries) and in so doing dodging a torpedo launched against a different country patent. With so much at stake, this argument is bound to surface.
The importance of the opt-out decision for litigation strategy is also likely to lead to challenges to the validity of the opt-out request made to the UPC registry. Was it properly constituted (for example, were the true proprietors named)? If not, a valuable patent could suddenly be exposed to central revocation.
For companies determined to use the UPC, there are further decisions to be made that relate to the structure of the UPC. The central division must be used for stand-alone revocation claims and claims for declarations of noninfringement.15 Its bench comes with a guarantee that one of the judges will have a technical background. For infringement actions, including PIs, the local or regional divisions may be used, where the bench may comprise legally qualified judges only (and with a varying degree of local flavor, as already mentioned). From a potential infringer’s perspective, should it wait to be sued in the local or regional division, or should it take the fire to the patent owner by starting an action proactively in the central division? Where infringement and revocation proceedings exist in parallel, the UPC has wide discretion on how to proceed, including a possibility to bifurcate the proceedings, dealing with the infringement case and validity case separately, or to stay the former or speed up the latter. The rules around these features of the system open up some potential for forum shopping.
State of Play
As this article makes clear, the UPC brings much to consider for pharma companies. And the clock is ticking. At the time of writing this article, the Provisional Application Phase of the new system has commenced, meaning that the countdown to the opening of the UPC has formally begun. It will happen. Once the final preparations have been completed, the sunrise period will begin, and the world will then be on notice that three months remain. The best guess as to what that means in real terms is that we are likely to see the UPC open for business in early 2023. It’s time to get ready.
1. Convention on the Grant of European Patents, Oct. 5, 1973, 1065 U.N.T.S. 199.
2. Agreement on a Unified Patent Court, 2013 O.J. (C 175) 1 (EU) [hereinafter UPCA].
3. Id at 1.
5. Regulation 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, 2012 O.J. (L 361) 1.
6. UPCA, supra note 2, at art. 83(1), (5).
7. Id at art. 32.
8. Commission Call for Evidence: Medicinal & Plant Protection Products – Single Procedure for the Granting of SPCs, Ref. Ares(2022)1726335 – 08/03/2022, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13353-Medicinal-plant-protection-products-single-procedure-for-the-granting-of-SPCs_en.
9. Case C-616/10, Solvay SA v. Honeywell Fluorine Prods. Eur. BV, ECLI:EU:C:2012:193 (July 12, 2012).
10. Rules of Procedure of the Unified Patent Court, r. 211.5 (18th draft Oct. 19, 2015) (adopted with amendments by the UPC Administrative Committee July 8, 2022) [hereinafter Rules of Procedure], https://www.unified-patent-court.org/content/official-documents-2nd-meeting-upc-administrative-committee-8-july-2022.
12. UPCA, supra note 2, at art. 83(4).
13. Rules on Court Fees and Recoverable Costs, art. 2 (Feb. 25, 2016), https://www.unified-patent-court.org/sites/default/files/agreed_and_final_r370_subject_to_legal_scrubbing_to_secretariat.pdf.
14. Rules of Procedure, supra note 10, at r. 5.1(a).
15. UPCA, supra note 2, at art. 33.