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Thursday, 26 September 2013

Apple, Samsung and Google unite in expressing industry's concerns on the UPC's Rules of Procedure

The AmeriKat awakes late at night to the sound
of a 3-page letter in her e-mail inbox....
Late last night, with less than a week to go before the deadline for the public to submit their comments on the Unified Patent Court's Rules of Procedure, the New York Times received a short letter. It is not unusual for the Times to receive letters, but it was unusual to receive one that was co-authored by some strange bedfellows. Only a matter of great importance could ever unite the likes of Apple with Samsung. And, indeed, it was a matter of great importance - the Unified Patent Court.

Authored by numerous Goliaths of Silicon Valley and beyond, including Google, Microsoft, Intel and Cisco, the open letter stated that, although they appreciated "that Europe has long worked towards a unified patent system", there were two aspects of the latest (15th) draft of the Rules of Procedure that may undermine the benefits of a unified system by creating opportunities for abuse. No prizes in guessing that the two aspects were bifurcation and injunctions.

The bifurcation complaint is well-rehearsed by this blog and others, but it goes something like this. In some jurisdictions infringement and validity of a patent are heard separately. One court can therefore find a patent is infringed without determining whether that patent is even valid. Defendants can therefore face the bizarre consequence where they are prohibited from selling their product on the basis it infringes a patent which may and is in fact invalid. Because in some jurisdictions infringement trials in a separate court can take a long time (if they happen at all), the period of time that a defendant could be off the market could kill the defendant's market.

The Agreement on the Unified Patent Court, and therefore the Rules of Procedure which is parasitic upon the Agreement, provide for bifurcation. The coalition states in their letter:
"By enabling this unbalanced patent system, the proposed new patent system could undermine, rather than promote, innovation in Europe, as producing companies could develop strategies to avoid European jurisdictions in fear of an unfair litigation system being too advantageous for patent proprietors. Such strategies could include divesting resources from Europe, thus driving genuine innovation elsewhere. And any significant increase in litigation costs would undoubtedly consume company resources which could be better spent on innovation and growth. Manufacturing companies in Europe should not be placed at a competitive disadvantage compared to companies that manufacture in other regions where patent jurisdiction is more balanced.

In order to mitigate the potential for such abuses before the UPC, procedural adjustments to the UPC rules of procedure are needed to provide clear guidance and predictability on how bifurcated proceedings where the validity of the patent is an issue should be handled and to permit defendants in bifurcated cases to more easily obtain a stay of infringement proceedings until a decision on patent validity has been reached."
There are, of course, already rules that should - to some extent - mitigate what has been dubbed "the injunction gap" (i.e the period of time between an infringement decision and decision on validity) by way of Rule 118(3) which provides for either condition subsequent orders or a stay of the infringement proceedings where there is a decision pending a revocation action. However, the application of the mitigating rules is untested, for obvious reasons, which presents an unknown risk to litigants. Will judges decide to bifurcate? Will they decide to order condition subsequent orders?

The second issue is injunctions. Rule 211 of the Rules of Procedure sets out the criteria for the granting of preliminary injunctions. What is a cause of concern for many industry members is that the word "may" is littered about that Rule in relation to the exercise of the Court's discretion. The rule of most concern is Rule 211(2) which states that "in taking its decision the Court may require the applicant to provide reasonable evidence to satisfy the Court with a sufficient degree of certainty that the applicant is entitled to commence proceedings and that the patent in question is valid and his right is being infringed".

Rule 211(3) states that deciding whether to grant an interim injunction "the Court shall have the discretion to weight up the interests of the parties." As the AmeriKat commented as part of her UPC Panel at AIPPI recent Forum in Helsinki earlier this month, "shall have the discretion" is just a fancy way of saying "may". If you may, you may also "not". That is the problem with the Court's discretion in relation to the granting of injunctions under the Rules of Procedure.

Injunctions under the Rules could, if the judge decides not to have any regard to the discretionary considerations, be granted almost automatically with little evidence. What could be an automatic injunction with effect across the 25 Participating Member States (a massive consumer market), becomes a powerful tool but one that could be prone to abuse by Patent Assertion Entities (PAEs). The AmeriKat teased the AIPPI audience in Helsinki with a snippet of this letter on this issue. She can now reveal the full comment from the coalition as follows:
"A rule that does not offer sufficient guidelines on when to grant injunctions will create strong incentives for abusive behaviors and harm the innovation that the patent system is designed to promote.

This will be particularly true with injunctions under the UPC because the UPC injunction power will extend beyond a single country to most of Europe, and it could be used with the intended effect of impeding product sales across the region. This substantial bargaining power to force excessive settlements from companies would, in all likelihood, lead to a rise of abusive litigation before the UPC. Indeed, PAEs have already begun to set up shop in several European countries, drawn by the potential for siphoning more revenue from European companies.

The potential for these types of abuses is not only theoretical. In the United States, litigation brought by Patent Assertion Entities (PAEs), entities whose business model is based solely on extracting settlements through the assertion of often low-quality patents, reportedly cost U.S. businesses $29 billion in 2011 alone and resulted in half a trillion dollars in lost wealth from 1990 to 2010. PAEs’ infringement claims are often spurious or based on invalid patents, as demonstrated by the fact that they prevail in less than 9% of the cases in which their claims are fully adjudicated on the merits. Despite the weakness of their legal claims, PAEs are often highly profitable due to their success in extracting settlements. The lucrative nature of PAEs has led to a rapid rise in U.S. patent litigation. Indeed, PAE litigation now accounts for the majority of all U.S. patent litigation. The diversion of revenues from R&D and patenting activities to pay for escalating litigation costs and excessive royalties is staggering, with no resulting gain to innovation.

To mitigate the potential for abuses of such power, courts should be guided by principles set forth in the rules of procedure to assess proportionality prior to granting injunctions. And PAEs should not be allowed to use injunctions for the sole purpose of extracting excessive royalties from operating companies that fear business disruption."
The AmeriKat, as she stated in Helsinki, has to be fair to the Rules of Procedure Committee - the "may" problem was inflicted upon us and on them by the Agreement (Article 62(2)). The only saving grace for a party, currently, is that a party can argue that court must weigh up the interests of the parties and must take into account the fact that the patentee is a PAE (for example, by referring to the position in granting injunctions under national law when PAEs are involved).

Google, Microsoft, Apple and the likes are of course not alone, many of these concerns were addressed in AIPPI's Position Paper on the Rules of Procedure (click here) and have been and will be addressed by separate submissions by industry and industry associations by the 1 October 2013 deadline.  However, given the prominence of its signatories, it is this open letter that some hope will make the Preparatory Committee (and indeed European politicians who were responsible for the Agreement) take notice of the real concerns that leading global players have about the UPC and the Rules of Procedure.

But perhaps the solution to these concerns does not lie in a change to the Rules (although the AmeriKat agrees that some further safeguards should be added), but  instead lies in the most uncertain of the UPC variables - the judges. As Judge Grabinski commented during the UPC panel in Helsinki, experienced judges will not (and should not) manage a case which could lead to the types of consequences outlined in the open letter.  The question then becomes for these companies, perhaps the fight is not in the Rules themselves (which are necessarily constrained by the Agreement), but in finding and training the judges who will be implementing them (see Darren's post on the call for applicants here).

So with that, who wants to organize the UPC Judges Training Sponsorship Drive? The AmeriKat has a few thoughts as to where we may be able to find some lucrative donors....


Anonymous said...

The US system is, however, to all intents and purposes already bifurcated. With the standard required for a finding of invalidity in the district court being one of "beyond reasonable doubt", it is somewaht unusual for a patent to be revoked there, hence the rush to file for re-examination at the USPTO where the standard is simply one of a balance of probability.

Anonymous said...

I seem to recall that at least Apple and Google are masters at avoiding paying tax on their profits. Why then do they seek to influence law makers when they have decided not to pay their fair contribution to society?

Anonymous said...

I think the open letter is referring to permanent injunctions rather than interim ones.

Anonymous said...

Anon @ 09:34
A case of no representation without taxation?

Anonymous said...

To Anon at 08:50

In a US district court the standard required for a finding of invalidity is "clear and convincing evidence". While higher than "the preponderance of the evidence" (balance of probablities), this is not as high as "beyond reasonable doubt".

Your point about the difficulty of invalidating a dubious US patent remains, but I think it is a bit more complex.

It includes features which are unique to the US litigation system, including the fact that you cannot commence a revocation action in a US court unless the patentee has issued a threat to sue. While an action in the USPTO involves a lower evidential standard and is cheaper, it typically estops you from subsequently raising the same issues in court. Do you want to trust the same authority that granted the patent to change its mind? As a result, US re-exam procedures have typically only been used as a tactic in parallel with litigation in court, rather than to attack a troublesome patent pro-actively. It is too early to say whether the recently revised USPTO post-grant procedures will change this.

And an important part of the business model of PAEs relies on the extremely high cost of US litigation, coupled with the inexperience of patent law in many district courts (and juries). For the alleged infringer, this can make settlement a sensible business decision, even if the validity of the patent is dubious.

The UPC brings a different but possibly overlapping set of issues, which are not yet settled.

I get the impression that bifurcation will be less of an issue than in Germany, because validity will be pleaded in detail before any bifurcation decision is taken. But if it happens, presumably it will still be possible that an infringement decision may be reached (and a preliminary injunction granted) before validity is decided.

And while the cost of a UPC action may be less than in the US, it will usually be substantially more than in individual countries such as Germany. Most litigants will not experience the cost reduction that would occur compared to a case where the likes of Apple and Samsung slog it out in multiple European countries simultaneously. So this still allows for the PAE business model to flourish.

Anonymous said...

"Manufacturing companies in Europe should not be placed at a competitive disadvantage compared to companies that manufacture in other regions [...]"

Can someone please remind me, where do Apple, Google and Samsung actually manufacture? How come they stand up for Europe's industry?

MaxDrei said...

I like the comment at 12:14 and would encourage that particular anonymous to hang in and make more contrributions.

In the context of comparing mainland Europe with the USa I would emphasise the difference between the "preponderance of evidence" standard and the "balance of probability". In Germany (template for the UPC?) , the "technical judges" are ex- Patent Office Examiners accustomed to wearing the mantle of the person skilled in the art. To assess the "balance of probability" they just need to read D1 and D2 and then rely on their own gut to tell them where the balance lies. So no need for that amusing concept of "evidence" much less to work hard to find out where its "preponderance" lies.

Evidence, who needs it? On occasion Samsung, I suspect. And Apple. And Google. And others headquartered outside mainland Europe.

Anonymous said...

I think the last author is right. The UPC rules on preliminary injunction is quite similar to the German practice established over the last decades. Thus, the fear of the signators seems pretty unjustified, as Germany has proven that production is still possible even under a regime where preliminary injunctions are available. I think the crucial point will be indeed reasonable judges. But, who can stop unreasonable judges anyway? As the agreement allows preliminary injunctions (even ex-parte), it is simply too late to fight this. The rules cannot change that anymore.

Magnus S said...

“By enabling this unbalanced patent system, the proposed new patent system could undermine, rather than promote, innovation in Europe, as producing companies could develop strategies to avoid European jurisdictions in fear of an unfair litigation system being too advantageous for patent proprietors. Such strategies could include divesting resources from Europe, thus driving genuine innovation elsewhere. And any significant increase in litigation costs would undoubtedly consume company resources which could be better spent on innovation and growth. Manufacturing companies in Europe should not be placed at a competitive disadvantage compared to companies that manufacture in other regions where patent jurisdiction is more balanced.”
I think that the authors may have simplified a bit. Not all European countries will be under the jurisdiction of the UPC. Companies could at present rather safely produce in Spain, for example (or maybe I should say “at least”). And should they be sued for patent infringement attacked locally in Spain, well, patent litigation in Spain is not that costly and the quality of the Courts in charge has improved a lot during the last decade. (And for companies establishing R&D and production in Spain to avoid the jurisdiction of the UPC, there may be a collateral bonus effect: for production and R&D that requires qualified staff, well, Spanish engineers are just as good as engineers in most other European countries, but they often work harder and for lower salaries. I have been working hear for almost 20 years, comparing what I see in Spain to what I know from back in Sweden, and this is my impression indeed.)

Anonymous said...

I expect that Art 33(9)UPC will create problematic situations because the article provides that the Court may - i.e. may not - stay its proceeding when an opposition is pending before EPO.

Anonymous said...

As Apple, Google et al. pay no EU taxes, why should anyone care about their opinion on EU law?

Anonymous said...

The EU should dismiss comments from EU Tax Cheats like Apple and Google.

Anonymous said...

No matter who made these comments. They are relevant and they point concrete issues.

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