Licensing regimes under the UPC: What will change?
A very frequent motivation behind patent applications is the possibility of subsequent licensing. Ultimately, patent applicants and owners may choose to sell their Intellectual Property (IP) title or grant a license thereto for various reasons. Granting one or more licenses allows one to exploit a claimed invention without manufacturing or selling the related product, which may not be feasible due to limitations in capacity or distribution. Meanwhile, licensing with a subcontractor also allows this party to use a protected process or device in a particular territory without the risk of being sued for infringement.
An inventor or patentee may also wish to take this path if they cannot afford the investment required for further development or exploitation. In the telecommunications industry, for instance, collaboration among competing companies is often necessary to develop new technology standards. To accomplish this, companies grant each other cross-licenses for their proprietary technologies. Royalties may also be paid for access to a jointly developed project or as a return on R&D investment.
Patent licenses are, therefore, valuable agreements by which applicants or proprietors of a patent agree not to forbid a named third party, referred to as the licensee, from operating some or all of the contained rights. In this way, both the patentee and the licensee can benefit from the invention as the licensing contract provides a significant source of income for the former and allows the latter to make use of the patented technology with greater legal safety.
With all that said, the opening of the Unified Patent Court (UPC) on June 1, 2023, raises questions about potential changes to existing licensing regimes. However, addressing these is not straightforward and may involve little-known aspects of the exclusive and non-exclusive nature of licenses for European Patents, be they opted out or not.
Patent licensing 101
The conditions for licensing patents are specific to IP law and generally go beyond traditional contract regulations. In most European countries, such as France, patent licenses are required to be established in writing at the risk of being invalidated (Article L-614-11 of the French Code of Intellectual Property).
Further requirements may apply in other jurisdictions. In Belgium, for instance, Article XI. 51 of the Code of Economic Law establishes the obligation to notify the national patent office in writing of all licenses. Quoting paragraph 5 of the same article, "the sanction for failing to record a license [is that it] shall have no effect vis-à-vis the Office and shall not be enforceable against third parties until the entry in the Register [...]." Therefore, the penalty for not registering a license at the national patent administration is its unenforceability against third parties, meaning that unregistered licensees cannot assert their rights against the patent assignee, thereby making them potentially liable for infringement.
Similarly, in the United Kingdom, an exclusive licensee must register within six months of the license date to be eligible for cost awards in legal proceedings involving the patentee (Section 68, UK Patents Act 1977).
On a more regional scale, the European Patent Convention (EPC) allows for the transfer of patent ownership and the granting of licenses through Articles 71 and 73. While such provisions apply to all European Patent applications filed with the European Patent Office (EPO), domestic laws still govern national patent applications and European Patent applications granted and validated in any of the 39 contracting states to the EPC, extending beyond the borders of the European Union.
Among the 39 EPC member states, the registration of a license pertaining to the national part of a European Patent application is essential as its absence may have troublesome consequences, e.g., licensees may not be empowered to act against alleged infringers.
In another example, under English law, if a license agreement is not registered and a third party purchases the patent without knowledge of its existence, the license will not be binding upon the purchaser. The licensee could therefore lose their rights under the license. As mentioned above, an unregistered licensee might be barred from claiming damages for any loss suffered due to infringement. This doctrine is also widely applied in the European Union today.
The rights of exclusive licensees to bring infringement actions before national courts in Europe are generally defined by the license agreement. In most European jurisdictions, an exclusive licensee has the same right to sue for infringement as the patent proprietor unless the license agreement states otherwise. Notably, in Germany, this rule applies without exception and without requiring the patentee's approval, while the rule is slightly different in the United Kingdom. According to the UK Patents Act 1977, a patent proprietor is granted the legal entitlement to initiate infringement lawsuits (Section 60). However, an exclusive licensee has the same right as the proprietor to sue for any infringement after the license's date (Section 67(1)). In the event that an exclusive licensee brings a court action, the patent proprietor must be joined to the proceedings (Section 67(3)).
Another issue that arises is whether the licensor is obliged to defend the licensed patents against third-party attacks. In the United Kingdom, this will depend on the interpretation of the license agreement. Generally speaking, as the exclusive licensee has the right to enforce a patent, they should also be able to defend the patent against counterclaims of invalidity unless the agreement specifies otherwise.
Having briefly overviewed the intricate status quo of patent licensing in Europe, how will these regimes evolve when the UPC opens its doors on June 1, 2023?
A new court for patent matters in Europe… and also for licenses?
Interestingly, under the UPC Agreement (UPCA), most existing provisions will remain in place for all European Patent grants and applications that are not opted out. According to Article 47(2) UPCA, the exclusive licensee of a European Patent – with or without unitary effect – is entitled to bring actions for infringement before the UPC. This shall remain true unless stipulated by the license contract or the European Patent has been opted out.
Although some countries, such as Turkey and the United Kingdom, will not be party to the UPC, most EPC member states have corresponding provisions, with the abovementioned Section 67 of the United Kingdom's Patents Act 1977 as a prime example.
Returning to the UPCA, the exclusive licensee is required to give prior notice to the patent proprietor before initiating any court action. Holders of a non-exclusive license are not entitled to bring infringement actions before the UPC unless expressly permitted by the license agreement (Article 47(3) UPCA).
Pursuant to Article 83(3) UPCA, and unless an action has already been brought by (or against) them before a national court, European Patent proprietors may choose to withdraw a previous opt-out request. The relevant patent or patent application is then said to be "opted back in" to the UPC's jurisdiction. As a consequence, any licensees may no longer bring or participate to an action before the national courts.
By the same token, if proprietors unilaterally decide to opt out a European Patent (application), their licensees lose the opportunity to intervene before the UPC since the national courts will have sole jurisdiction in such cases. In other words, these owner prerogatives mean that the licensee has, in the end, little freedom regarding possible post-grant litigation in Europe. There are, however, some exceptions.
An important one is, unless provided otherwise, the prospect of forestalling future opt-outs. Indeed, while licensees' prior say in decisions to opt out a European Patent (application) may be almost inexistent, the UPCA allows them to "lock it in" at the licensor's expense. Should the licensee initiate an action in the UPC, the proprietor is no longer permitted to declare a subsequent opt-out. Licensor-licensee communication is therefore essential here to avoid any mishaps in future efforts.
A look at the unforeseen
The following hypothetical can illustrate the problems of overlapping access to litigation. A given company, "X," owns a European Patent and validates it in France and Italy. After grant, company X exclusively licenses the rights to operate the technology in these two countries. While the French exclusive licensee, "Y," starts operating the invention to its own and sole benefit in France, the Italian licensee, "Z," subsequently becomes aware of a potential infringement of the technology by a third party, "A," in Rome.
In this example, the French licensee Y must comply with Article L. 615-2 of the French Intellectual Property Code, which states that in order to sue A for infringement, it must give notice to the patent owner before acting. After this, Y can lawfully enforce its rights in and with effect for France, thereby joining licensor X to any infringement action brought against A before the French courts, with the possibility of claiming damages.
A first issue becomes apparent if licensor X does not participate in the action brought by exclusive licensee Y in front of the national court since the latter becomes the sole decision-maker regarding the future of the French part of the European Patent. In addition, if the corresponding patent has not been opted out, a second issue is the possibility for potential infringer A to file a central UPC revocation action against the patent, incidentally or as a means of defense. If followed by A, this strategy could lead to the consequence of seeing the European Patent revoked in both jurisdictions at once, leading to its annulment ex tunc, without licensee Z located in Italy being able to react against the situation.
This leads to an imbalance between the scope (and chances) of enforcement on the one hand and the scope (and associated risk) of revocation on the other. While the proprietor's involvement in a counterclaim for revocation is certain (as per Article 47(5) UPCA), the above situation highlights that proprietors and / or additional exclusive licensees might not be consulted beforehand or even receive the time to consider the feasibility of such a defense.
Thus, the mechanisms provided for by the UPCA are, in some cases, more permissive than many national laws. This highlights the crucial fact that any legal action initiated by a licensee could irreversibly impact the opportunities available under Article 83 UPCA for opting out. As demonstrated, if a licensee files a lawsuit before the UPC, it might be too late to safeguard the patent from a comprehensive revocation action via the opt-out provision. It is not difficult to visualize the possibility of disastrous consequences for proprietors who have entered into contracts with multiple licensees across different European territories.
What to watch out for?
Should a license agreement be the subject of legal action after June 1, 2023, it is essential for all stakeholders to determine the applicable law, jurisdiction and competent court. To this end, licensing agreements usually specify the governing law and the place of jurisdiction or arbitration. The parties should, however, keep in mind that national laws may also outline the competence of specific courts for patent matters. In particular, the UPCA does not provide for the jurisdiction of the UPC to assess disputes relating only to license agreements, which means that national courts will remain competent for such matters even after the establishment of the UPC.
While the national case laws of most member states generally accept infringement actions by licensees, the scope and requirements of such actions may differ significantly. After notifying the patent proprietor, non-exclusive license holders can bring an action before the UPC "in so far as expressly permitted by the license agreement" (Article 47(3) UPCA). This provides new options for non-exclusive licensees that, under national laws, are often unable to sue on their own in infringement cases.
Additionally, contract clauses governing disputes toward third parties should be carefully reviewed in order to avoid the pitfalls of the new system. However, this also raises new questions concerning applicable law and the interpretation of existing agreements when it comes to the UPC. As a licensee of a European Patent (application), possible actions may directly depend on the licensor's decision to opt out from the UPC.
Licensees should therefore discuss with their licensor in advance to find a common position and ensure that any desired opt-outs or unitary effect requests are duly filed. Last but not least, to avoid adverse consequences, parties to a license agreement should always clearly define together whether the proprietor intends to opt out from the jurisdiction of the UPC and whether the licensee may file actions in the UPC or national courts.
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