Claiming costs and expenses in High Court litigation as licensee

A recent High Court decision reduced a licensee’s damages award by 35% because it had failed to promptly record its exclusive licence – a costly consequence of ignoring the requirements of Section 68 of the Patents Act 1977 (for further details please see "Reasons for recordal 1, 2, 3…").

In the first-instance decision of L’Oréal Société Anonyme & L’Oréal (UK) Limited v RN Ventures Limited (2018 EWHC 173 (Pat)), Mr Justice Carr decided in favour of the claimants (collectively L’Oréal) that RN Ventures Limited had infringed L’Oréal’s patent and registered design rights. The judge also determined in L’Oréal’s favour regarding the validity of its patents – defeating RN’s claim that L’Oréal’s patents were invalid.

L’Oréal had roundly succeeded on the substantive issues, but the court still had to decide costs. As the ‘loser pays’ principle applies in English and Welsh court litigation, winners can expect to recover a proportion of their costs from the losers. The proportion will vary depending on the rules of the court and is generally subject to judicial pruning (judges have wide discretion with regard to cost awards – for example, they may refuse to award unreasonable or disproportionate costs). Therefore, the winner can expect to recover only a proportion of its costs from the defendant.

UK licences and cost awards pre-L’Oréal
Under the Patents Act, assignment or licence recording is optional. However, Section 68 of the act encourages parties to record assignments and licences as follows:

“Effect of non-registration on infringement proceedings. Where by virtue of a transaction, instrument or event to which section 33 above applies a person becomes the proprietor or one of the proprietors or an exclusive licensee of a patent and the patent is subsequently infringed… before the transaction, instrument or event is registered, in proceedings for such an infringement, the court or comptroller shall not award him costs or expenses unless –

(a)the transaction, instrument or event is registered within the period of six months beginning with its date; or

(b)the court or the comptroller is satisfied that it was not practicable to register the transaction, instrument or event before the end of that period and that it was registered as soon as practicable thereafter.” (Emphasis added.)

In 2006 Section 68 was amended by statute and the current wording (above) is rarely the subject of judicial consideration.

Before the Supreme Court's 2013 decision in Schutz v Werit (2013 UKSC 16), a successful licensee could reclaim all of its costs as from the date on which the transaction was recorded. The practical effect of this interpretation was to make licence (or other transaction) recordal one of a number of ‘tick box’ items that a potential claimant would complete before issuing an infringement claim. The licence would be recorded and the claimant would start to incur the significant legal costs of the infringement action.

In Schutz v Werit the Supreme Court rejected this interpretation because it would “leave [Section 68] with very little bite” (ie, the section would be unable to encourage parties to keep the patent register up to date).

L’Oréal
In L’Oréal v RN the challenge for the court was how to give Section 68 of the Patent Act the 'bite' it required to give an appropriate decision on the apportionment of costs in the case.

Figure 1 illustrates that RN had infringed L’Oréal’s patent for four years after the licence had been granted, but before it had been recorded. Given that the licence was recorded in the same year that the claim was launched, the proportion of total legal costs that L’Oréal (UK) Limited and L’Oréal Société Anonyme were entitled to recover was unclear.

First, the court considered the scope of the exclusive licence between L’Oréal (UK) Limited and L’Oréal Société Anonyme. L’Oréal Société Anonyme was the patentee and the scope of the licence was wide enough to enable both the patentee and its exclusive licensee (L’Oréal (UK) Limited) to bring an action as claimant against RN Ventures and to recover damages.

As both parties were equally entitled to act as claimant in the action, the legal costs (and recovery) were split 50/50 and any deduction was solely from L’Oréal (UK) Limited (the licensee).

Second, the court penalised only L’Oréal (UK) Limited for costs that it had incurred in the patent infringement case relating to infringements that had occurred before the licence had been recorded.

This meant that L’Oréal (UK) Limited could recover costs incurred relating to:

• the patent invalidity case;
• the design infringement case; and
• a proportion of the costs of the patent infringement case relating to infringements that had occurred after the licence had been recorded.

Figure 2 illustrates how the court apportioned L’Oréal (UK) Limited's (the licensee) legal costs.

The court calculated the pre-recordal infringement costs incurred by the licensee at 17.5% of the total legal costs (ie, 35% of the licensee’s share of the total legal costs) and thus reduced the costs awarded to the licensee by 35% (a reduction on the overall cost award of 17.5%).

Comment
While there are many good reasons for recording a licence and keeping an up-to-date register, this case illustrates the tangible effect of failing to record a licence: the threat of missing out on recovering legal costs. In another case the proportion of unrecoverable legal costs may have been higher (for example) if only the licensee had been a claimant or if there had been no invalidity action.

L’Oréal provides two specific actions for patent infringement claims in which a licensee is intended to be a claimant in infringement proceedings:

• Record the licence as soon as possible after execution, ideally within the six-month period in Section 68; however, if this is impracticable, as soon as possible thereafter and certainly as soon as the potential claimants suspect a possible infringement (even before instructing counsel regarding the infringement).
• Check the terms of the licence – it is exclusive? If so, what is the scope of exclusivity? Does it permit the licensor to bring proceedings as well as the licensee? If so, this may help to recover costs if the licence was not recorded before the infringement commenced.