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22 March 2016PatentsRowan Freeland

What would a ‘Brexit’ mean for the UPC and patent litigation?

Friday, June 24 2016. The result of the ‘Brexit’ (British exit) referendum is announced. The British people have voted to leave the EU. What happens then? Actually, we don’t know. The European Union Referendum Act 2015 requires the government to hold a referendum, but it says nothing about what happens afterwards.

Although London mayor Boris Johnson (briefly) and former Conservative Party leader Michael Howard (still) have argued that an ‘out’ vote will mean the renegotiation of better ‘stay’ terms, Prime Minister David Cameron has said that he will give notice to leave under article 50 of the Treaty on the European Union straight after an ‘out’ vote. Article 50 provides that a country wishing to leave the EU serves notice and then negotiates the terms of withdrawal, ‘taking account of the framework for its future relationship with the union’.

There is no provision for an article 50 notice to be withdrawn. The EU treaties cease to apply to the country which gave the notice on conclusion of the withdrawal agreement or, “failing that”, two years after the notice was given. The two years may be extended by agreement (Greenland’s exit took three years to negotiate, and that was just about fisheries), and until the article 50 notice expires, the UK will remain a member of the EU. So an ‘out’ vote means that the UK will remain an EU member for at least two years while it negotiates its exit.

Meanwhile, back in the preparatory committee of the Unified Patent Court (UPC), work proceeds towards bringing the UPC into being. The UPC Agreement will come into force four months after 13 countries have ratified it, “including the three member states in which the highest number of European patents had effect” in the previous year. The UK is one of these member states (along with Germany and France) whose ratification is a condition precedent for the UPC.

It is currently expected that the required number of ratifications will be achieved in about November 2016, and that will usher in the period of provisional application during which work can commence on the practical setup of the court, for example, the recruitment and training of judges and court staff, and testing of IT systems. Will a Brexit vote in the UK knock this schedule off course?

Questions after a vote to leave

The key concern is whether a Brexit vote would affect the UK’s ratification. The first question, therefore, is whether the UK will ratify before the referendum. The answer is no. The government has passed the necessary amendments to the Patents Act 1977, but the UK cannot ratify until it has also passed orders on privileges and immunities for UPC judges and staff for the UK countries.

The privileges and immunities terms for all member states were only agreed by the preparatory committee on February 25, 2016. It is unlikely that there will be sufficient time for these orders to be prepared and approved in Scotland before the dissolution of the Scottish Parliament ahead of the Scottish elections on May 5, 2016. Thereafter, the UK civil service will be ‘in purdah’ pending the referendum on June 23, during which it can do nothing that would be inconsistent with the result. In practice, therefore, the UK will not be in a position to ratify the UPC Agreement until after June 23.

Can the UK ratify after an ‘out’ vote? Until the UK finally leaves the EU at the end of a (probably extended) period of notice under article 50, there is no legal reason why it may not ratify the UPC Agreement. However, following an ‘out’ vote, politically it may not be feasible to ratify a European agreement straight away. This gives rise to a nightmare scenario where the UK would fail to ratify; the UPC would then remain in a limbo until the UK left the EU, at the same time leaving the UPC and  bequeathing its position as a ‘top three patents’ member state to Italy.

In order to prevent this, the ratification provisions of the UPC Agreement would need to be renegotiated. This could be a perilous proceeding, as once the possibility of a change to the agreement is opened, other countries may seek concessions which they failed to gain in the original negotiations as the price for agreeing to revise the ratification provision.

“Cost is one of the important factors which will drive the decision to go for a unitary patent rather than a bundle of nationally validated European patents.”

The alternative would be for the UK to ratify and then negotiate its departure in a more orderly fashion, in parallel with the negotiations under article 50. It has been suggested that the UK would automatically leave the UPC upon its departure from the EU (which would avoid the problems of a renegotiation), but this is probably incorrect. The Court of Justice of the European Union in its opinion 01/09 (on the European Commission’s original proposal for the UPC) stated that the UPC can include only EU member states, but this is not expressly provided in the UPC Agreement, and the agreement would therefore need to be revised if it were to continue to comply with EU law, as laid down in opinion 01/09, following a Brexit.

If the UK ratified and then negotiated to leave in due course, the London local division and the London pharmaceutical/chemistry branch of the UPC central division would be able to open and function (and realise some of the significant investment that the UK government has made in the premises). There would be time to arrange a phased transfer of the central division branch to its new location (probably in Italy, the successor to the UK because it’s one of the top three UPC countries in which European patents are validated).

The government would have to weigh up on the one hand the inconvenience of a hastily agreed revision to the UPC Agreement to exclude the UK (and writing off the cost of the Aldgate Tower premises) against the inconvenience to UK industry of being in and then a few years later being out of the new system.

The impact on patents

What will it mean for patent owners if the UK leaves or never joins the UPC? The vast majority of patents are not litigated, and for many patentees the main interest of the UPC is that when it enters into force it will become possible to designate a European patent, upon grant, as a ‘European patent with unitary effect’ as an alternative to a bundle of national designations for the member states of the UPC.

How will the UK’s departure affect the desirability of the unitary patent? Cost is one of the important factors which will drive the decision to go for a unitary patent rather than a bundle of nationally validated European patents. Renewal fees for the unitary patent were set to match the renewal fees for ‘bundle’ patents in the four most popular UPC member states. The UK is designated by 90% of all European patents, so if the UK is no longer in the UPC the number of European patents which are designated in four UPC member states will decrease.

Assuming there is no significant change in the countries that are designated in future, the proportion of European patents granted after the unitary patent becomes available for which the unitary patent will be a suitable option on cost grounds will be smaller if the UK has left the EU than if it stays. This suggests that the take-up of the unitary patent will be lower than if the UK remains in the EU.

What will it mean for patent litigation if the UK leaves or never joins the UPC? In continental Europe, the UPC will become available. The attraction of the UPC is that it offers an injunction in every UPC member state in which the European patent-in-suit has been validated. That means all of the states for unitary patents.

For conventional European ‘bundle’ patents, however, the position is different. More than 50% of European patents designate only Germany, France and the UK. The attractiveness of a court which can handle infringement litigation for all three countries is manifest, but the advantages of a court which can handle only two are less clear, especially since legal costs in the UPC are likely to be higher than in Germany or France alone.

There are also more subtle implications. The UPC rules of procedure give the judges significant discretion, particularly in procedural matters. British judges routinely exercise their discretion, weighing several different factors in making procedural decisions. In continental legal systems, however, the procedural possibilities are more limited, and continental judges have little experience of weighing numerous factors as opposed to deciding whether a required threshold has been reached. British judges in the new UPC are expected to play a significant role in educating their continental counterparts in how to deal with these more complex discretionary procedures.

In addition, there is a widespread but frequently unstated concern that the UPC will be ‘too German’. Germany has the largest number of patent judges and the highest number of patent cases in Europe. With four German local divisions planned, the German judges are likely to have a significant influence on the development of the new court. Many commentators hope that the British and Dutch (and French) judges would form a counterweight so that the new system would indeed be a new and more balanced one, and fear that the Dutch and French judges alone may not be enough.

The change that will not take place

Patent litigation in the UK will not change if the UK leaves the EU. European patents (UK) and national UK patents will continue to be litigated in the English High Court or Intellectual Property Enterprise Court under the current rules of procedure.

There are, however, two concerns. The first is the change that will not take place. At present, the English High Court is the most expensive court in Europe in which to litigate patents. This is because its procedures require significant work on documents and with witnesses.

Attempts are being made to limit these procedures through the Shorter and Flexible Trials Schemes, and thereby to reduce costs, but practitioners are nervous about missing an advantage were they to adopt these new procedures. Experience of the UPC—where producing documents and cross-examining witnesses will be limited—is expected to educate practitioners and inform their approach on domestic litigation, creating opportunities to reduce costs. That will not happen if the UK is outside the UPC.

A more subtle possible change relates to influence. At present, European patent judges meet at the annual Venice Conference and elsewhere, and this has led to an increased willingness to acknowledge and respect judgments from other European courts. Through this process, the English judges, whose rulings are probably the most fully reasoned and accessible, have earned significant influence. This is reflected in the popularity of the English High Court as a ‘first strike’ jurisdiction, whose judgments (it is hoped) will influence courts elsewhere in parallel cases.

If the rest of Europe is in the UPC and the UK is out, then this influence is likely to wane, as the UPC Court of Appeal lays down the law for the UPC member states and UK law gradually either diverges or follows in the UPC’s wake.

Rowan Freeland is a partner at  Simmons & Simmons. He can be contacted at: rowan.freeland@simmons-simmons.com

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