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Glyn Moody

Glyn Moody's look at all levels of the enterprise open source stack. The blog will look at the organisations that are embracing open source, old and new alike (start-ups welcome), and the communities of users and developers that have formed around them (or not, as the case may be).

Something Rotten in the State of...Europe: the Unified Patent

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A few weeks back I wrote about the Danish referendum on whether to join the Unified Patent system. Despite my presentation in Copenhagen urging them to reject the idea, the Danish people somehow decided to vote in favour, which means that their country will be welcoming the Unified Patent Court (UPC) - and, I predict, a whole bunch of woes.

Now, you may think that’s an exaggeration, and just some completely eccentric view that I have. But at least I am not alone in fearing the worst, as this paper by Dimitris Xenos, entitled, “The European Unified Patent Court: Assessment and Implications of the Federalisation of the Patent System in Europe”, makes clear. Here’s part of the summary:

there is evidence that the UPC Agreement was rushed and its impact assessment was not based on valid data. Therefore, questions are raised about the implications it may have, especially those regarding language arrangements in the litigation proceedings and the impact which may arise from the loss of national sovereignty, as national judges will no longer be able to adjust patentability standards to the development and sustainability needs of local businesses. This article examines the impact of the loss of national sovereignty and argues that, to the extent that the UPC establishes a monopolistic source of legal power which escapes the control of the democratic policy-making process, its authority is problematic.

It begins with a short but extremely clear description of what the UPC is, and how it will function – recommended reading for those of us still trying to get our brains around this extremely complex system (no, it won’t simplify the patent system in Europe – quite the contrary....) Here’s the key paragraph:

The UPC will operate in relation to an upgraded framework of patents that are granted by the European Patent Office (EPO), with such patents being able to have unitary effect in all participating states (i.e. those which have approved the relevant EU Regulation). By replacing the jurisdiction of the national courts in enforcement and invalidity proceedings of such patents, the UPC will take exclusive competence to determine all disputes relating to patents with unitary effect. The new system has all the main characteristics of a federal court, apart from the name. However, although a federal structure is adopted, important elements are strikingly different. First, the EU states do not form a federation under which benefits are pursued for the common good of one state and second, there is no legislative authority to influence the economic policy which underlies the determination of the legal principles and standards that define patents as objects of property in the UPC system.

As that notes, the UPC is essentially unconstrained in its power: there is no legislative authority to guide it in its principles, which means that it doesn’t even have to try to maximise the benefit of patents for the European public, say. This is then followed by an analysis of the EPO patenting landscape – and it’s pretty unusual:

the majority of patents are granted to companies that are not based in the EU. In the EU zone, one state, Germany has almost as many patents as the other 26 EU states. It is also evident that the EU patent landscape is divided into patent-export countries and patent-import countries. The data also indicate that the technological research output of most EU countries is dwarfed by non-EU research activity.

An additional element of the picture is that most of patents are granted to very large firms. In 2012, two German multinationals, Siemens and Robert Bosch obtained 1655 patents, added together, that is almost as many patents as all UK applicants (a total of 2021 patents).

That is, most EPO patents go to non-EU companies, and of those that do go to European concerns, most are in Germany, and most of those are to just two companies. So the idea that the EPO is some deeply European institution serving most EU companies is completely wrong: it’s largely for foreign companies plus a couple of German giants.

The next section of the paper goes on to examine how things will change with the introduction of the UPC:

The creation of the UPC involves the following constitutional issues: Firstly, under the UPC system, the proprietary nature of patents will be determined exclusively by the legal standards and principles of a judicial body that will no longer be influenced by the economic policies of legislators. Secondly, this new source of power will consist mostly of foreign nationals who will be called to determine proprietary rights without reference to the needs and capacities of the national state and its people.

Here’s why that will be problematic:

As patentability principles and standards are ultimately influenced by considerations of policy for economic development, what would the UPC’s policy choices be? On one hand, if the UPC does not take into account economic development policies in order for its decisions to appear ‘objective’, ‘pan-European’ and ‘uniform’, then the adjudication and development of law will be made by a zombie mechanism which pursues no purpose and has no direction. On the other hand, if the UPC considers economic policies, the following questions beg for answers: which policies will be followed, for which sector, how much weight should be given to a certain policy over another, how will these policies be determined, how will these policies ever be appropriate for all European countries at the same time given the wide discrepancies in development that exist among them, and ultimately, why should a judicial institution have sole decision-making competence for the underlying economic policies?

There is no precedent in the political history of modern democracies where important property issues affecting the economic sustainability and development of a country, and the proprietary rights and business prospects of its people, were conclusively and exclusively taken by a judicial body at supranational level. A democratic policy-making process for the determination of patents as objects of property exists, of course, in all countries of the world, including the US, whose system the UPC tries to imitate. The difference is that the US unified patent system does not escape democratic control, and the economic policies that it serves are widely debated by legislators, judges, economists, lawyers and industry players, all of whom are residents of the same country.

Xenos then goes on to note the central importance of judges in national courts as a kind of fine-tuning mechanism, and concludes:

The crucial point that this section makes is that the role of the national judge in patent law is a matter of high constitutional importance. The UPC, which will create a monopolistic source of legal power, tries to imitate the US federal patent system. However, it fails to secure the most basic element needed by such a court, which is its ability to identify appropriate patentability standards that suit the development needs of the economy. The UPC cannot identify economic policy needs simply because there are neither one people in Europe nor a federation for which its federalised structure could be justified. As ‘uniform’, ‘pan-European’, ‘one-size-fits-all’ standards cannot be determined without reference to a clear economic policy, these standards cannot be imposed in absolute terms. To the extent that the monopolisation of legal power which is created by the UPC escapes the control of the democratic policy-making process, the legal authority of the UPC appears to be problematic.

Having painted this rather bleak picture, the author then goes on to examine impact assessment studies of the likely effect of moving from the present system, which allows national judges to apply economic and social criteria, to the new UPC, which does not. It turns out that at the European level, there is precisely one such study, financed by the European Commission. Here’s how the current paper describes it:

The EU Commission commissioned an impact assessment (i.e. costs-benefits) study on the UPC which was carried out by the Ludwig-Maximilian University of Munich. The University’s report entitled ‘Economic cost-benefit analysis of a unified and integrated European patent litigation system’ was published on 26 February 2009. This is the one and only official study that the EU Commission has produced to justify the setting-up of the UPC. The scientific value of this report has been questioned, if only because of its very limited scope (see the discussion in this section below and in section 4.2.1). For example, in the UK, SMEs account for 99% of businesses, and the same or higher percentage applies to most of the EU countries. The Ludwig-Maximilian University’s report covers the SMEs in one short paragraph which contains a few general statements, and makes no serious attempt to provide a cost-benefit analysis of the UPC in this context. As noted above, the European Scrutiny Committee of the UK Parliament dismissed this report as containing errors and being, admittedly, outdated. Additionally, this report does not sufficiently address the issue of patent trolls litigation that will expand in Europe once the patent litigation system is centralised by the UPC. Apart from some general information regarding the patent trolls phenomenon in the US, it fails to note that it is the centralised federal patent system of the US and forum shopping that has facilitated patent-troll practices. The only thing that the report offers is a general advice that “when it comes to the design of the unified Patent Court, the danger of ‘trolling’ should be taken seriously.”

This means that we have even less information on the likely impact of the UPC than we do for TTIP – and as readers of the blog well know, for that there is precious little. Although not at the European level, it’s worth mentioning a Polish study on the effects of the UPC in that country because of the conclusions that are drawn by the authors of the report, which are likely to apply to many EU nations:

The study shows that there will be a surge of costs resulting from the sudden influx of new foreign patents – European patents in force estimated to be around 1 million in 2043 – which will become enforceable in the country, as the local business will try to ensure that they are not infringing the exclusive rights of others. Indeed, as the costs appear to run into tens of billions of Euros over the next decades, they will amount to a sizable part of the country’s economy and, certainly, will be onerous for local SMEs.

Indeed, the findings were so dire, that the Polish government decided to take drastic action:

using the findings of the Deloitte report as a base estimate, the Polish government decided to walk away from the UPC agreement for which, ironically, it worked hard to promote during its EU Council presidency in 2011.

That alone should set the alarm bells ringing – not so much that the UPC is dangerous because the risk assessment has been so shallow (which is true), but that even limited analysis makes it plain that it is likely to be an unparalleled disaster costing European companies billions of euros as foreign companies pile in, patent everything, and then demand licensing from everyone – with threats to sue otherwise. That’s particularly the case for software patents, where the US experiences shows us how much damage trolls can cause. The UPC will open up Europe for software patent trolling on a massive scale.

There’s much more detail about the deep problems with whole UPC idea in this important paper, which I strongly recommend people to read, if only to be fore-armed for the problems that are likely to hit companies when it is introduced in the UK (because, yes, we aren’t being given any choice the matter.) Here’s the conclusion of Xenos:

In short, the issue of surrendering an important element of national sovereignty that concerns vital economic policies and property rights requires a comprehensive economic study about the effect that the UPC will have on local business and economy. Irrespective of whether or not the UPC is challenged in national courts (e.g. the state’s sovereign ability to determine property rights; the right to fair trial regarding the language issue in patent litigation, etc), or there is a constitutional obligation for a referendum (e.g. Ireland, Denmark), non-expert politicians and lay people cannot rely solely on an outdated study which was of limited scope that the EU Commission has presented to the states nor can they rely solely on the advice of the patent profession which benefits most from the considerable expansion of its business activities. Since the very important issue of national sovereignty in the context of patents is at stake, comprehensive and thorough national economic studies must be prepared in order for the decision-makers to make an informed choice, and the people, who will ultimately come to evaluate this choice, to be able to understand the various parameters involved.

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