Does the UPC serve up new feeding grounds for US non-practising entities?

Well-resourced NPEs looking to play the injunction card are eyeing up the court—companies with European operations should prepare, say Tom Oliver and Jessica Rosethorn of Powell Gilbert.

Europe’s new Unified Patent Court (UPC) opened its doors in June 2023. For the first time, patent owners have had the opportunity to bring a case before a single court in which they could assert patents covering multiple European jurisdictions.

Although the UPC is not necessarily the most appropriate venue for resolving all European patent disputes, the benefits of enforcing patents in the court are clear. In the first nine months, there has been a steady stream of cases filed in the UPC, illustrating the inherent attractiveness of the system.

The efficiencies offered by the UPC compared to the previous European patent litigation landscape also posed a question—would Non-Practicing Entities (NPEs: companies that don’t practice their patented inventions, but instead seek to license them to third parties) rush to take advantage of the UPC to enforce their patents across the UPC’s 17 European states?

The answer, initially at least, was “no”. In the first six months, the UPC cases filed were between a wide variety of operating companies seeking to assert their patent rights against one another, but there was no real NPE activity.

However, more recently, a number of NPEs have brought actions before the UPC. These have included actions brought against ARM Group in relation to semiconductor design tools; against Texas Instruments, Audi and Volkswagen in relation to integrated circuit designs and message exchange in integrated circuits; against Samsung in relation to network capacity preserving techniques; and against Cisco in relation to methods for high speed packet processing in wireless networks.

This article examines whether the UPC is an attractive venue for NPEs and considers what those operating companies which are concerned about NPEs should look out for as the first wave of NPE cases get underway.

Why NPEs favour the US

NPE business models vary. At one end of the spectrum, universities may seek to raise funds from their research by licensing the related patents. At the other end are entities established with the sole purpose of acquiring patents and asserting them against alleged infringers.

Historically NPEs have largely focussed on asserting their patents in the US courts.

Key characteristics of US litigation which are attractive to NPEs include the potential for juries to award very significant damages (including treble damages for wilful infringement); the relatively trivial US court fees for bringing a patent infringement action; and the fact that it is unusual for an NPE to be ordered to pay the defendant’s legal costs if their case is unsuccessful. Faced with the high legal costs involved in defending a US claim for patent infringement by an NPE, defendants often opt to settle by taking a licence to the patent(s).

In comparison, Europe has generally been considered unattractive for NPEs. The fragmented system of national litigation, limited damages awards and the prospect of having to pay the defendant’s legal costs if the litigation is unsuccessful have traditionally dampened the appetite of NPEs to extend their litigation campaigns across the Atlantic.

The UPC: An unattractive venue?

Some of the underlying mechanics of the UPC may explain the initial reluctance from NPEs in pursuing cases at the UPC.

The UPC court fees can be substantial, increasing significantly with the value of the dispute. The court fee for a dispute valued at €4 million is €37,000. For the highest value actions (value in dispute of €50 million or more) the court fee balloons to €326,000.

Further, the UPC follows the “loser pays” rule—unlike the US, the losing party must pay the winning parties’ costs, meaning an NPE will face paying the defendant’s costs if their claim is not successful. The cap on recoverable fees also increases with the value in dispute: €400,000 recoverable costs for a dispute valued at €4 million, increasing to €2 million recoverable costs for a dispute valued at €50 million.

If there are multiple defendants, all separately represented, the adverse costs exposure for an NPE may be significant.

Finally, even if successful, an NPE will only be able to recover compensatory damages; neither punitive nor treble damages are available. And, unlike in US litigation, liability and damages proceedings are typically decided sequentially, meaning that the damages claim is not litigated until after a finding of infringement and validity.

Or a significant pressure point?

However, against this, the UPC offers something that US litigation does not – the prospect of an injunction. Whilst injunctions have always been available to NPEs in Europe’s national courts, the UPC supercharges the downside risk for defendants. Any injunction could now extend across up to 17 European states with a population comparable to that of the US.

Additionally, UPC litigation is intended to be quick. While US District Court litigation might take three years or more to get to a jury verdict, the UPC is intended to come to a liability decision within 12 months, and injunctions can be enforced pending any appeal.

Further, the UPC’s Rules of Procedure provide that, following a finding of infringement, the UPC can order interim damages to be paid which are intended to cover the patentee’s costs of the subsequent damages phase. Unlike the historic situation in national European litigation, those damages proceedings potentially cover a very significant market, incentivising NPEs to press ahead with the prospect of high value damages claims.

It is notable that all the new UPC NPE cases highlighted above are the subject of a pre-existing US patent infringement dispute between the same parties. For deep-pocketed NPEs with strong patents and infringement claims, the UPC will be an attractive way of increasing the pressure on defendants. The UPC presents significant additional risk to defendants and potentially accelerates the time in which an NPE can expect a licencing agreement to be reached.

Asserting European patents in the UPC to supplement a US action may therefore become a standard litigation playbook for NPEs.

Proportionality: A lifeline for defendants?

The injunction risk is the UPC’s trump card for NPEs. However, there is no automatic entitlement to an injunction. The UPC Agreement provides that the UPC “may”, rather than “shall”, grant an injunction against the infringer. Further, the recitals to the UPC Agreement state that the UPC should strike “a fair balance between the interests of right holders and other parties” and take “into account the need for proportionality and flexibility”.

This raises the question as to whether an injunction will necessarily be available to NPEs in the UPC. For example, will the UPC grant an injunction against the sale of a brand of cars across Europe because they happen to incorporate a chipset that infringes an NPE’s patent, even where substitution for a non-infringing chipset can be achieved only at an exorbitant cost, and the NPE has no competing interest in preventing the sale of those cars?

The prevailing view amongst European judges and practitioners to date seems to be a hesitant “yes”. But faced with the reality of such a high impact injunction, the answer may be more equivocal. Ways to mitigate the effect of the automatic injunction may emerge, such as a delay in an injunction coming into effect to allow a workaround to be implemented.

The concept of proportionality may therefore play a significant role in the grant of an injunction and NPEs and operating companies will be well advised to pay close attention to the proportionality tests adopted by the UPC in the first wave of merits decisions expected in the summer of 2024.

Defensive steps

Potential defendants and their suppliers should not sit by and wait to be the subject of UPC proceedings. There is plenty they can do to improve their position. Early preparatory work to ensure they are not caught off guard by a UPC action and pre-emptive revocation actions in the UPC (or EPO opposition if available) to knock out NPE’s patents are the obvious steps.

If the likely patents in suit are currently opted-out of the UPC, then commencing national litigation will prevent the withdrawal of the opt-out, locking the NPE out of the UPC.

And, unlike in many national European courts, there is the potential for would-be defendants and their suppliers to go on the attack and seek declarations of non-infringement at the UPC in relation to future products – clarifying the situation before millions is spent on manufacturing lines and marketing campaigns for products that may infringe an NPE’s patent.

In summary

The UPC is unlikely to attract NPEs in the same way as the US litigation system. But, for well-resourced NPEs with high-quality patents, the UPC offers a significant additional pressure point in any dispute.

Companies that are already the subject of NPE actions in the US would be well advised to be on their guard.

Tom Oliver is a partner at Powell Gilbert.

Jessica Rosethorn is an associate at Powell Gilbert.