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....