Property and contractual aspects of Unitary Patents and of patents in the UPC system

23 December 2014

The introduction of the Unitary Patent Package, consisting of the Unitary Patent (UP) and the Unified Patent Court (UPC) raises new issues with regard to patents as an object of property and with regard to contractual aspects of both Unitary Patents and traditional European patents. The law of property and contract law have not been harmonized throughout the European Union. Actually, there are big differences, especially between common law systems such as the United Kingdom and Ireland on the one hand and civil law systems on the other hand. The Unitary Patent Package is not aiming at providing a solution for this. Actually, recital 6 of the Unitary Patent Regulation (UPR)[1] provides: “As an object of property, a European patent with unitary effect should be dealt with in its entirety, and in all the participating Member States, as a national patent of the participating Member State determined in accordance with specific criteria such as the applicant’s residence, principal place of business or place of business.” This is then repeated in Article 7(1) UPR, followed by further details on how the place of business is determined.

Thus, property aspects of Unitary Patents are determined by national law, not by the rules of the enhanced cooperation, with some small exceptions. Article 3(2) UPR provides that a Unitary Patent can only be transferred in respect of all the participating Member States. However, it may be licensed in respect of the whole or part of the territories of the participating Member States. Such licence agreements are further subject to national law.

Licence of right

Nevertheless, one specific type of licence is dealt with in the Unitary Patent Regulation itself, the so-called Licence of right of Article 8 UPR. The proprietor of a Unitary Patent may file a statement with the European Patent Office (EPO) to the effect that he is prepared to allow any person to use the invention as a licensee in return for appropriate consideration. Basically this is an offer to conclude a FRAND licence, a licence on fair, reasonable and non-discriminatory terms and conditions, like the ones for standard essential patents. If the offer is accepted, it leads to a contractual licence, subject to the applicable law of contract as determined by Article 7 UPR, except that there should be “appropriate consideration”. Since the concept of appropriate consideration is in the Regulation itself, it is an autonomous Union law concept, subject to interpretation by the Court of Justice of the European Union (CJEU). The UPC will have exclusive jurisdiction for disputes on the level of the license fees under Article 32(1)(h) UPC Agreement (UPCA),[2] but not with regard to the rest of the dispute on such a licence. The level of such licence fees is one of the issues where the UPC will have to refer questions of interpretation to the CJEU where appropriate.

It is unclear whether the declaration of Article 8 UPR should contain all conditions of the possible licence agreement. The Regulation does not require this explicitly, but on the other hand it seems to provide that any third party can use the invention in any way he pleases, as long as he pays an appropriate consideration. That would imply that there would be no further conditions, but in practice that is hard to imagine. In fact, the provision that this relationship should be treated as a contractual licence already implies that it should or at least can contain further conditions.

The previous version of the Unitary Patent Rules of 28 June 2013[3] contained some provisions on the content of this Licence of right in Rule 8. It provided that the declaration by the third party shall state how the invention is to be used and that such third party shall report on that use on a quarterly basis. The explanatory note on this draft said that Rule 8 is modelled on Rule 10 of the Implementing Regulations to the Community Patent Convention 1989 (CPC 1989).[4] The CPC 1989 indeed contained an Article 43 on Licences of right. Rule 10(2) of the Implementing regulations to part II of the CPC 1989 provided that after the declaration has been made, the person making it shall be entitled to use the invention in the way he has stated. This seems to mean that no further licence agreement is necessary and no conditions can be imposed on such licensee. Apparently the EPO Select Committee did not want to go that far in its 28 June 2013 draft, but nevertheless it met with a lot of criticism, according to which it was not for the Select Committee to set specific terms for licence agreements. More recent versions of the Unitary Patent Rules do not contain any provisions on the content of the Licence of right anymore. The most recent version of 9 December 2014, where the provision is renumbered as Rule 12, only deals with the registration of the declaration and the effect on the renewal fees.[5] It would therefore seem that a Licence of right is an agreement that needs to be negotiated in the same way as for instance FRAND licences for standard essential patents. The UPC can decide whether the level of the licence fees is appropriate, but in doing so should take into account all conditions of the agreement, as the value of the licence of course depends on its scope.

The Licence of right could become a useful tool for the exploitation of patents that no longer relate to the core business of the proprietor. Currently such patents are often sold to special purpose vehicles, or even auctioned. The EPO Licence of right register as meant in Article 9(1)(c) UPR could function as an eBay for patents, where interested parties could find patents that are available for licensing on reasonable terms and conditions. The advantage for the proprietor is that there will be a reduction in renewal fees for such patents under Article 11(3) UPR. Of course, this will only become available for Unitary Patents, not for traditional European patents.

UPC Agreement and property

The UPC Agreement contains some provisions that affect both Unitary Patents and traditional European patents as an object of property. Strictly speaking, the rights conferred by the patent and the limitations to those rights as provided in Articles 25 - 29 also affect it as an object of property, but I will not deal with those here, as in European patent law this is generally not seen as part of the patent as an object of property.

As mentioned above, Article 32(1)(h) UPCA gives the UPC exclusive jurisdiction for disputes on the level  of the license fees for Licences of right under Article 8 UPR, although subject to interpretation of the substantive criterion by the CJEU.

Actions brought by licensees

The most far-reaching provision however is Article 47(2) UPCA, which says that unless the licensing agreement provides otherwise, the holder of an exclusive licence shall be entitled to bring actions before the Court under the same circumstances as the patent proprietor, provided that the patent proprietor is given prior notice. This provision has immediate effect and deviates from the national law in some Contracting Member States,[6] like for instance the Netherlands. In addition, Article 47(3) UPCA says that the holder of a non-exclusive licence shall not be entitled to bring actions before the Court, unless the patent proprietor is given prior notice and only in so far as expressly permitted by the licence agreement.

These provisions require a careful examination of all current licence agreements, since the authority for the licensee to bring an action has a serious side-effect. Under Article 47(5) UPCA the validity of a patent cannot be contested in an action for infringement brought by the licensee where the patent proprietor does not take part in the proceedings. In such case, the defendant who wants to challenge the validity of the patent shall have to bring action against the patent proprietor. This suggests that the defendant has to bring a separate action for invalidity, but that is not true. Rule 25.1(i) and 25.2 of the UPC Rules of Procedure[7] provide that, if the proprietor is not the claimant in an infringement action, the Court Registry shall serve a copy of the counterclaim for revocation on the proprietor, who will thereby become a party to the revocation proceedings. If he chooses not to appear, a default judgment invalidating the patent can be granted against him under Rule 355. This may for instance happen if the proprietor does not lodge a defence against the counterclaim under Rule 29(a) and 29(f) within two months of service. Thus, allowing a licensee to bring action may have serious repercussions for the patent proprietor. Therefore, it seems wise for the patent proprietor to always provide in any licence agreement that the licensee is not allowed to bring a patent infringement action, but instead has to report any alleged infringement to the proprietor, who shall then decide whether he wants to bring an action. The proprietor would probably not want  a provision in the agreement that obliges him to bring action.

On the other hand, licensees may of course want to have a clause in the licence agreement that allows them to bring action or that at least gives them some control on whether the proprietor is obliged to do so. Again, with regard to actions before the UPC, such provisions should also be introduced in existing licence agreements, as this will be a completely new law that directly interferes with existing agreements. In order to avoid doubt with regard to updates of existing licence agreements in such cases, it is advisable to state explicitly that the licensee has the authority to bring infringement actions before the Unified Patent Court (and other courts). If this is provided, the licence agreement should also contain a provision on the decision to opt out traditional European patents from the jurisdiction of the UPC under Article 83 UPCA. Otherwise the licensee might have the right to bring an action before the UPC, but that becomes meaningless if the proprietor opts out the whole patent from the UPC’s jurisdiction.

The law applicable to a Unitary Patent as an object of property

The main issue dealt with in the Unitary Patent Package in relation to patents as an object of property and contractual issues is the law that applies to a Unitary Patent as an object of property. This is governed by Article 7 UPR, which in my view is indeed exclusively dealing with patents as an object of property, as it explicitly says in section 1.

Side step: the meaning of Article 5 on uniform protection

It may be confusing that Article 5 UPR, which deals with uniform protection, provides in section 3 that “the acts against which the patent provides protection referred to in paragraph 1 and the applicable limitations shall be those defined by the law applied to European patents with unitary effect in the participating Member State whose national law is applicable to the European patent with unitary effect as an object of property in accordance with Article 7”. At first sight this seems to mean that infringement is subject to national law, that law being defined by Article 7. However, this has a different meaning, which can only be understood from the history of the Regulation.[8] Originally, the provisions on infringement were in the Regulation itself. Due to a political decision in June 2012 they were moved to the UPC Agreement, but the European Parliament objected to that. In the end a political compromise was reached, due to which the Regulation refers to national law in Article 5(3), but the national laws on infringement of Unitary Patents of all participating Member States include the UPC Agreement and therefore this reference is actually intended as an indirect reference to Articles 25 – 29 UPCA.[9]  In light of this, some publications that say that the scope of protection of all Unitary Patents owned by non-EU proprietors are subject to German law, are not telling the whole story. Nevertheless, it cannot be excluded completely that some issues regarding infringement are not completely covered by the UPC Agreement, Union law and other international laws and should therefore be decided under national law as provided by Article 24(1)(e) UPCA in combination with Articles 5 and 7 UPR. However, it seems likely that at least a number of Contracting Member States will bring their national laws in line with the UPC Agreement, at least in relation to European patents, including Unitary Patents (but maybe not for national patents).

Article 7 on applicable law

Article 7 UPR provides that a Unitary Patent for property purposes is subject to the national law of the participating Member State in which the applicant has his residence or principal place of business on the date of filing of the application for the European patent, as recorded in the European Patent Register at the EPO. Thus, Unitary Patents applied for by citizens and companies in the 24 participating countries are governed by their national law, which is quite logical. If a company has its principal place of business outside the UP territory, but has an additional place of business within that territory, the property aspects of the Unitary Patent are governed by the law of that country.[10] If the patent proprietor had no establishment within the territory when he applied for the patent, German law applies, as that is the law of the seat of the EPO. That solution is quite usual under Union law and has now also been adopted for the enhanced cooperation. Similar provisions can be found in the Community Trademark Regulation, Community Design Right Regulation and the Community Plant Variety Rights Regulation (in which they point to Spanish law, because OHIM is based in Alicante, and French law, because the CPVO is based in Angers).

The situation is a bit more complicated for co-owned Unitary Patents. Such patents are subject to the national law of the co-owner who is listed first in the European Patent Register, provided he has his residence or principal place of business in the UP territory. If not, it is the national law of the applicant next in line having his residence or principal place of business in the UP territory. If this approach does not provide a solution, the same rule is applied based on an additional place of business. If that does not solve the problem either, German law again applies.

Article 7 UPR only applies to granted patents, since unitary effect can only be applied for after grant. Patent applications are also property rights as follows from Article 60, 61, 71 - 74 and 148 European Patent Convention (EPC)[11] and basically also from the judgment of the European Court of Human Rights in Anheuser Busch vs Portugal.[12] However, applications are governed by the pre-existing laws on property as determined by Article 74 EPC, not by the instruments of the Unitary Patent Package.

Co-ownership

All property-related issues are governed by the national law that is determined on the basis of these rules. This includes the law on co-ownership, which varies throughout the 24 countries. AIPPI has studied the law governing co-ownership as Question 194. National reports on 14 of the 24 UP countries can be found on the AIPPI website.[13] All 41 countries that were examined by AIPPI world-wide allow co-owners to make their own contractual arrangements. In the absence of a contractual arrangement, national laws provide various regulations, but often require the cooperation of co-owners for important decisions, such as on licensing. It is however clear that it is preferable for co-owners of patents to indeed make some contractual arrangements on issues that might be important for their cooperation.

Although Article 7 UPR does not mention this, such contractual arrangements can also include a choice of law. The Rome I Regulation is part of the national law of all 24 countries and therefore always part of the national law indicated by Article 7 UPR.[14] Article 3(1) Rome I Regulation gives the parties a freedom of choice of the applicable law, with some minor exceptions for mandatory provisions of national and Union law.[15] This means that co-owners can choose the law that they want to apply to their agreements on how the co-ownership is managed.  That should be done anyway, as Article 7 UPR only provides a solution for the 24 countries where the Unitary Patent will apply, but not for the remaining 14 EPC countries (and of course does not apply at all to a traditional European patent).

Ownership issues cannot be litigated before the UPC, which only has jurisdiction on those issues that are listed in Article 32 UPCA, as confirmed by Article 32(2) UPCA. The Contracting Member States were not prepared to hand over such issues to a supranational court, as they were considered to be an important element of the sovereignty of these nations. Conflicts between co-owners thus have to be litigated in the national courts. It is therefore advisable to include a choice of forum next to the choice of law in the co-ownership agreement.

Obviously, no national law on co-ownership deals with issues that are specific to the Unitary Patent Package yet, so it is important to deal with all of these in the co-ownership agreement, bearing in mind that national laws basically allow for this. Of course, the choice of law still has an influence. Common law contracts are different from civil law contracts. If the choice of forum is an important issue, it is wise to choose the law with which that forum is accustomed. If for instance the chosen forum is the District Court The Hague, Dutch law is a logical choice.

Issues for co-ownership and licence agreements

A co-ownership agreement should preferably be concluded before the patent application is filed and thus well before an application for unitary effect can be filed. The agreement should preferably include provisions on the decisions to be taken during prosecution, which may include that one of the co-owners is allowed to make prosecution decisions on behalf of all co-owners. One of the most important prosecution issues is whether to file for divisionals, which now can be done up to grant. A divisional can be used to obtain a Unitary Patent next to a traditional European patent for almost the same invention and thereby create a maximum freedom of choice for enforcement. Next, the agreement should provide how the decision on applying for unitary effect should be made, which again may be delegated to one co-owner. Further, it should contain provisions on licensing, including the allowed level of sub-licensing and whether a statement on a Licence of right under Article 8 UPR may be filed. Obviously, the co-ownership agreement may also contain rules on the sale of a share in the patent by one or more of the co-owners.

A further issue is patent enforcement. In case of a Unitary Patent, enforcement will of course be through the Unified Patent Court, which in that case has exclusive jurisdiction. However, there are options for forum shopping among the various UPC divisions, which will certainly initially have a certain amount of “couleur locale” and different levels of experience of the judges, meaning that there still are some real choices to make. Therefore, even in case of a Unitary Patent, the agreement should not only deal with when to enforce, but also where to enforce. Finally, the agreement should contain a provision on the decision to let the patent lapse, which in case of a Unitary Patent can only happen for all 24 countries at once.

If the choice was not to apply for unitary effect, but stick to a traditional European patent, the agreement first of all should provide in which countries the patent should be validated, or at least a regime to reach that decision. Next it should provide something on the decision to opt out of the UPC jurisdiction under Article 83 UPCA, and possibly opt in again at a later stage.

Further, the regime for enforcement is of course very important, since for a traditional European patent the usual national courts system will be available, but on top of that the UPC system. The forum of choice may not only depend on the patent, but also on the infringement at hand, meaning that a final choice of course cannot be made in the co-ownership agreement itself. Instead, it should contain rules on how that choice is made, which again may be delegated to one of the co-owners.

Actually, even if the choice is for unitary effect, that of course only applies to 24 of the 38 EPC Member States, so decisions on all the issues involved in traditional European patents still need to be made with regard to the remaining countries, including on whether to validate in Italy[16] and, if so, whether to opt out of the UPC jurisdiction for Italy (although that probably makes little sense if the UPC has jurisdiction for the other 24 Contracting Member States anyway, due to the unitary effect).

With regard to all of these issues, there is freedom to make specific arrangements in the co-ownership agreement. For instance, if one co-owner can make the necessary decisions during prosecution, that does not mean that he is automatically entitled to decide on unitary effect and opt-out; that depends on the agreement.

Thus, a co-ownership agreement can become quite elaborate if it should contain provisions on all of these issues. However, it can also be very simple if all decision are simply delegated to one of the co-owners, with complete freedom to decide. Or it could be anywhere in between. The most important notion is that this should be an informed decision.

The issues dealt with above are also relevant for most licence agreements. Although many licence agreements are only concluded post grant, this may be different if the knowhow underlying the patent is also licensed. If the licence agreement is already concluded pre grant, all the issues which are relevant during prosecution as mentioned above may be covered. Obviously, a licence agreement should also contain a choice of law and a choice of forum, as discussed above for co-ownership agreements.

Limitations to the choice of law and to the contractual arrangements

There are some issues for which no freedom of choice of law exists, such as the actual transfer of the property rights to a patent (not the agreement to do so). The requirements for a valid transfer normally are mandatory and the law that applies to them is the law determined by Article 7 UPR. Also, the kind of security that can be provided depends on the applicable law under Article 7 UPR, as do the effects of insolvency. Indeed, for patent proprietors from outside the Unitary Patent territory who do not have an establishment within that territory, German law will apply to these issues.

Compulsory licences, though very rare, are a further exception. According to recital 10 UPR these should be governed by the national law of each participating Member State where they apply. That is logical, since they result from government interference, which is by nature limited to the national territory.

The rights of employees who contributed to an invention may be governed by their employment contract or by collective bargaining agreements, but will otherwise be governed according to Article 60(1) EPC by the law of the State in which the employee is mainly employed, or in the absence of such State, of the State in which the employer has the place of business to which the employee is attached. Disputes on this issue normally arise where the employment contract does not cover the issue properly. Article 8 Rome I Regulation protects the employee against an unfavourable choice of law.

In some countries, a transfer of a patent and the granting of licences require the consent of all co-owners, regardless of the agreement between them, as for instance seems to be the case in the Czech Republic, which also has specific limitations on the transfer of a share in the patent. Most participating Member States however have more relaxed regimes.

In general, since preferably the choice of forum and the choice of law should be linked, it seems wise to choose a country that has a sufficient level of experience in efficient and effective patent litigation and maybe even in co-ownership and licence litigation, since that raises legal certainty and predictability. Investors may also have a preference for the laws and fora of one of the major jurisdictions. In any case, it should be an informed decision based on the circumstances of the technology and relationship at hand and not a random decision.

When to act

Existing co-ownership relations and licence agreements should be reviewed before the Unitary Patent Package comes into force, since important new decisions need to be made already now. For instance, it may be sensible to file for a divisional for a pending patent application now and keep the divisional pending until the Unitary Patent becomes available. Opt-out will become available ahead of the entry into force of the UPC Agreement during a so-called sunrise period, which is necessary since an opt-out only takes effect once entered into the register, whereas numerous applications are expected. As the Unitary Patent Package will likely come into force early 2016 and the sunrise period will start at least some months before that, patent portfolios need to be reviewed now. As soon as the UPC Agreements comes into force, the provisions on actions brought by licensees will apply to existing licence agreements, which therefore should be checked beforehand. The future complexity of enforcement also requires careful consideration, which may result in changes to co-ownership and licence agreements. With most likely little over a year left, preparing for the Unitary Patent Package should start now.



[1] 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, L 361/1.

[2] Agreement on a Unified Patent Court of 19 February 2013, 2013/C 175/01.

[3] Draft Rules relating to Unitary Patent Protection, SACEPO WPR 10/13.

[4] Agreement relating to community patents (89/695/EEC), L 401/1.

[5] Draft Rules 1 – 24 relating to unitary patent protection – consolidated version, see http://www.epo.org/about-us/organisation/select-committee/documentation.html. This is the almost final version. Only Rule 25 on the cover for expenditure incurred by the European Patent Office is still open for discussion.

[6] The 25 EU Member States that have signed the UPC Agreement are called “Contracting Member States”, as they have concluded an Agreement. The 24 EU Member States (excluding Italy) that participate in the enhanced cooperation on the Unitary Patent are called “participating Member States”.

[7] See the 17th draft of the UPC Rules of Procedure of 31 October 2014, published on the website of the Preparatory Committee, http://www.unified-patent-court.org/images/documents/UPC_Rules_of_Procedure_17th_Draft.pdf

[8] Article 33 of the Vienna Convention of the law of treaties provides that recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31 of the Vienna Convention, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable. Although the Unitary Patent Regulation is not a treaty, it makes sense to apply this rule by way of analogy.

[9] A detailed description on how this compromise was achieved can be found in I.B. Stjerna, “Unitary Patent” and court system – New problems ahead? The explanation of Article 5 by the Cyprus Council Presidency is found at page 3, left column. See http://www.stjerna.de/index_en_htm_files/Unitarypatent-New_problems_ahead.pdf

[10] Article 7 UPR requires that this is determined on the basis of the European Patent Register, which currently does not contain additional places of business. However, the register will need to be expanded to accommodate the Unitary Patent Package anyway, so this will most likely be solved. Nevertheless, this solution will not help for applications that were filed before the register was changed. This is also not yet covered by the most recent version of the Unitary Patent Rules.

[11] See also the Protocol on Jurisdiction and the Recognition of Decisions in respect of the Right to the Grant of a European Patent (Protocol on Recognition) to the EPC of 5 October 1973, especially Article 1.

[12] ECHR 11-01-2007, 73049/01, Anheuser Busch vs Portugal, paragraph 76 – 78. This was a trademark case, but the reasoning that led the court to its ruling would also seem applicable to patent law.

[14] Regulation (EC) 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law applicable to contractual obligations (Rome I).

[15] Article 4 Rome I in my view does not apply to Unitary Patents as an object of property, since Article 7 UPR should be regarded as a lex specialis.

[16] Italy has signed the UPC Agreement but currently does not participate in the enhanced cooperation on the Unitary Patent.

Authors

Pors-Wouter

Wouter Pors

Partner
Netherlands

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