31 Jul

A perfect storm means that Europe now has the chance to lead

While legislators and the courts conspire to make life ever harder for patent owners in the United States, across the Atlantic imminent changes are taking the narrative in the opposite direction. This all means that Europe has a historic opportunity to assume global patent leadership

Many in the United States still talk of its patent system being the envy of the world. But even if that were once true, it is very hard to make such a case now. There are just too many things that seem to be going in the wrong direction. Patent quality is a major issue that has yet to be resolved, with the kill rate of patents and patent claims via the new inter partes review and covered business method proceedings at the Patent Trial and Appeal Board calling into question standards applied in the original prosecution process. In the most recent IAM benchmarking survey, 28% of corporate and 24% of private practice respondents rated the quality of the patents issued by the US Patent and Trademark Office as “adequate” or “poor”. There’s not much to envy there.

Meanwhile, the Supreme Court has significantly muddied the waters on issues as basic as eligibility and obviousness; while Congress seems to be on a never-ending reform loop. And all that is before you factor in the increasing and apparently sceptical interest that the Department of Justice and Federal Trade Commission are taking in patent monetisation business models.

These days, it seems that the United States has a patent system in which only those with the very deepest pockets can hope to thrive, as well as one that positively encourages bad behaviours. There are the companies whose only strategy is to patent everything that moves; the trolls that harass everyone from mom and pop stores to big technology companies; the licensors that make demands based on absurd valuations that they must know cannot be agreed; and the alleged infringers that will not sit down to talk, but instead seek declaratory judgments of non-infringement and/or respond to any approach by saying, “Sue me.” Frankly, it is a mess.

Need for change

It is absolutely clear that to be the envy of the world, the United States needs patents that are consistently of higher quality; that there has to be clarity around patentability; that transparency in ownership must be prioritised; that litigation should be cheaper; that both sides in a dispute need to see negotiation rather than confrontation as the most effective route to resolution; and that business models should not matter.

At the coalface, all sides know what the problems are and how they might be solved – while they may not say it in public, they readily acknowledge it in private. Unfortunately, though, most of the decisions are not being made at the coalface, but higher up in company command chains, within lobbying organisations, by judges influenced by highly partial media reporting of dubious data, and by politicians who are more concerned with triangulation and contributions than getting things right.

Depressingly, all this means that it is hard to see how anything much will change any time soon – despite the recent news that a House of Representatives vote on the Innovation Act is likely to be delayed until September or October. That the United States has arrived at this juncture is a sad state of affairs. It is extremely bad news not only for the United States itself, but also for the rest of the world, which has benefited significantly from the myriad life-enhancing and life-saving innovations which the Americans have delivered over the last 70 years.

In Europe, a different story is unfolding

Although the situation in the United States may be confused, developments on the other side of the Atlantic mean that very soon, Europe could become the centre of the global patent market.

As all patent owners should know, EU member states are now finalising the creation of a unitary patent and the Unified Patent Court (UPC) system in which to litigate it. Once that happens, there will be a single right available, covering over 25 countries with a combined population in excess of 600 million. At the end of June, two developments indicated that the day that both come into being could be sooner than many had anticipated.

First, the UK government strongly indicated that it is seeking to finalise preparations for accession to the UPC Agreement by Spring 2016. The United Kingdom – along with France, Germany and 10 other EU member states – must ratify the UPC before it can begin operating. There has been speculation that the UK government’s commitment to a referendum on continued membership of the European Union by the end of 2017 would hold up plans to finalise UPC membership. Should that not turn out to be the case, because seven countries have already ratified (including France), just Germany and four others would need to do the same for the UPC to be all systems go.

The second development was the announcement that the European Patent Office (EPO) Administrative Council’s select committee on the unitary patent system has agreed that the renewal fee package for the new patent “corresponds to the total sum of the renewal fees currently paid for the four most frequently validated countries (Germany, France, UK and the Netherlands)”. This means that the owner of a unitary patent will pay less than €5,000 in renewal fees over 10 years instead of the €30,000 that it would currently pay for coverage across the European Union.

Profound change, big opportunity

The practical effect of these major developments is to bring closer the day on which the entire European patent system is transformed. At any time, the creation of a one-stop jurisdiction in an economically advanced territory of hundreds of millions of people with relatively low litigation costs, the wide availability of injunctions and generally high-quality patents would be of major importance; but with events in the United States now making enforcement there far less attractive, the emergence of the UPC regime has assumed even greater significance.

Once it is up and running, the new system will have implications far beyond litigation. For a start, the value of patents issued by the EPO will almost certainly rise – after all, the ability to secure an injunction based on one right in an area comprising some of the world’s most advanced, wealthiest economies is an attractive one. Potential asserters of patents will want to ensure that they own the best possible assets, while those that could fall foul of such assertions will want to ensure that they do not.

Owners of EPO-granted patents will need to assess their strength and enforceability – perhaps with a view to selling some of them, developing monetisation programmes internally or outsourcing them to a third party; alternatively, defence may remain the priority. If it turns out that a corporate portfolio is short in some areas, making acquisitions now – when prices are lower than they are likely to be in, say, June 2016 – might be the right option. But whatever way you look at it, it is incumbent on all those likely to be affected by the new regime to start planning for it now.

For intermediaries, aggregators, law firms and other support service providers, there are also numerous strategic issues to think through. Patent attorneys, for example, may well find themselves doing a lot more work from scratch for non-European applicants, and being able to charge accordingly, rather than just adapting patent applications that have previously been filed elsewhere first. For their part, top European patent litigators will probably be called on to do a lot more first-stop, big-ticket international work than has been the case up to now. The unitary system should also lead to much greater opportunities for intermediaries and other service providers, which will be called on to develop specifically European products that reflect Europe’s heightened importance in the patent market.

Looking beyond the patent market

But things could go further than that. Should Europe become a much higher priority for patent owners and litigants, there is also the opportunity for the continent to develop leadership in, and set global standards for, a number of vitally important areas that extend beyond the patent market per se.

Valuation is one area that immediately springs to mind. With the global market more interested in European rights, patent-owning entities in Europe will have to think much more carefully about how much their assets are worth and how they get to meaningful figures that accurately express values. This in turn presents other issues, such as the development of sustainable and transparent ways in which to offer patent-backed financings and the perennial challenge of putting patents (and other types of intellectual property) onto company balance sheets. After all, if European patents will be worth more, should that not be something that is immediately apparent to investors?

Europe also has the chance to set the standard when it comes to ownership and transaction transparency. It can set rules that patent owners will have to follow – whether they like it or not. If Europe says no to the ownership of patents by shell companies, that is how things will have to be. If it decides that all transfers must be recorded at the EPO, then this will have to happen; it could even require that prices paid must be listed. People may not like it; but if they want to operate in the world’s most important patent market, what choice will they have?

And with this transparency will come a lot more data that will make valuation, financing and investor information provision ever simpler, thus reinforcing the leadership that Europe will have established.

Keep a firm focus, remember the real issues

Up to now, Europe has been something of a backwater when it comes to the patent market and everything that springs from it. Instead, the pace has been set by the United States and, increasingly in recent years, Asia. Now, however, it is possible that all this could change.

For this to happen, though, decision makers and companies in Europe must learn the right lessons from the US experience. The most important of these is not to get bogged down in a debate about trolls – the much lower cost of litigating in Europe and the much higher quality of the patents issued by the EPO mean that they will never play much of a role. Those that argue otherwise generally do so for their own selfish reasons.

Because trolls are not a big issue, there also should not be too much concern about injunctions. Plaintiffs will win cases only if they have good assets and these have been infringed. Of course, this will suit non-practising entities that assert high-quality assets; but much more significantly, it will also prove immensely helpful to small and medium-sized enterprises seeking to protect themselves from infringing Goliaths. But this will work only if Europe ensures that it keeps the cost of patenting and enforcement relatively low, while also doing absolutely nothing to compromise the quality of what is issued by the EPO.

Most people in Europe have not even begun to think through everything that the unitary patent system could deliver. There will be immediate gains for some; but over the medium to long term, there will be opportunities for the continent to lead the way in exploring and then setting standards for issues of major importance in a global knowledge economy that is underpinned by R&D, invention and innovation. If the right decisions are made in the right timeframe, Europe could ensure that it sets the de facto rules that everyone must follow.

For far too long, inertia and suspicion of patents, combined with a lack of political and corporate understanding, have meant that Europe has been a spectator as others have set the world’s patent agenda. Now that the United States no longer seems interested in taking the lead – at least until it realises the damage that recent events have done – the future is Europe’s to take.