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Clifford Chance

Clifford Chance

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Impact of the UPC on patent contracting – practical implications and strategic considerations

Uniform protection, a more efficient enforcement regime and fast procedures – all this is being promised under the umbrella of the new unitary patent system, which became finally accessible as of 1 June 2023, after seemingly endless efforts and numerous hurdles. The UPC will permanently change the European patent landscape. At the same time, the importance of commercializing patents – such as SEPs – is steadily increasing: patent holders can exploit their inventions through licensing or cooperation agreements and allow other companies to use the patented technologies and develop them further in return. But how will the UPC influence the existing contracting practice? Which aspects will parties need to consider for both current and future contracts? And how can these be practically implemented? All the aforementioned questions are addressed in the following article, with a specific focus on (i) the maintenance and termination of the unitary effect under the UPC, (ii) arrangements for prosecution of IP rights and patent infringements, and, finally, (iii) strategic considerations for parties dealing with such contractual issues.

(i) Maintenance and Termination of Unitary Effect under the UPC

Since 1 June 2023, the applicant of a European Patent (EP) has the option to request the grant of unitary effect at the European Patent Office within one month of the grant of the European Patent (Rule 6 of the Rules relating to Regulation (EU) 1257/2012). For existing European patents, the patentee is granted the right to withdraw his patent from the jurisdiction of the EPC until one month prior to the expiry of the seven-year transitional period by notifying the Registry ("opt-out", Art. 83(3) UPCA). He may as well transfer the patent back to the UPC system at any time during the above-mentioned transitional period ("opt-back", Art. 83 (4) UPCA).

Against such background, there is an obvious need for contractual adaptation (of license arrangements), e.g., if the licensee objects against the patent proprietor's decision to apply for unitary effect or to declare an opt-out/opt-back. In particular, a licensee holding an exclusive license will have a significant interest in ensuring that he has a contractual (veto) right on the basis of which he can demand that the licensor declares an opt-out, opt-back or applies for unitary effect. In the case that the licensee should find himself in weaker negotiation position, the license agreement could also provide for an obligation on the part of the licensor to consult with the licensee in order to resolve the situation jointly.

Another relevant scenario is the situation of patent co-ownership. If the patent is owned by several co-owners, they can only jointly declare the opt-out or opt-back as well as the request for unitary effect (Rule 5(1), Rule 6(2)(b) of the Rules relating to Regulation (EU) 1257/2012). Consequently, if a co-owner refuses to agree to an opt-out procedure, the existing European patent remains under the jurisdiction of the UPC. Here, a contractual adjustment is also essential. The parties should develop a joint filing strategy in advance (e.g., within the framework of co-ownership agreements or R&D collaborations) and contractually determine corresponding obligations to cooperate with regard to a joint opt-out/opt-back or with regard to a joint filing approach for all patent owners.

(ii) Arrangements regarding the prosecution of IPR and handling of patent infringements

Under the UPC, the same principles apply as before: Both the patent proprietor and the exclusive licensee (unless otherwise provided in a contractual arrangement between the licensee and the licensor) may take legal action for patent infringement (Art. 47(1),(2) UPCA). The non-exclusive licensee must be granted its own right of action (Art. 47(3) UPCA).

However, each individual right of action is accompanied by certain risks which may make it useful for the licensor to reconsider whether the granting of such rights, in fact, is beneficial. For illustration purposes, the following example may help:

A is the owner of a European patent with unitary effect. He licenses this patent exclusively (however, territorially limited) to B in Germany, to C in France and to D in Italy. The parties have refrained from contractual waiving Art. 47 (1) UPCA, and hence each of the exclusive licensees may assert patent infringement claims in the respective national/local courts.

If D now brings an action before the respective competent court, the defendant could, as one option, object during the proceedings that the patent licensed by A must be declared invalid and/or, as a second option, he may argue that there is no infringement of the patent at all. If the court agrees with this counter action, the patent would be declared as null and void not only with effect for Italy, but due to the uniform effect in all contracting member states. As a result, licensees B and C would lose their market exclusivity, and patent owner A would be threatened with the loss of royalty payments. In addition, A can no longer declare an opt-out from the moment when D files the lawsuit. By bringing the infringement action before the Unified Patent Court, he is prevented from doing so (Cf. Art. 83 (3) UPCA).

All these risks require contractual handling and adjustment. The patent proprietor should therefore include wording in the license agreement to ensure that lodging an action for patent infringement is subject to his prior consent or even exclude such rights for the licensees in their entirety. Also, an appropriate compensation mechanism (e.g., by way of a contractual penalty) could be agreed upon, which would mitigate the loss of royalties in case of an invalidity judgment.

Another (not strictly contractual) aspect that requires attention is the relevance of the order of the co-applicants of a patent. In case of a plurality of patent owners the right to bring an infringement claim independent from the other co-owners is primarily determined by the national law of the UPC member states. In this regard, the applicable national law is determined by the order of the applicants in the patent application (Art. 7(2) Regulation (EU) No. 1257/2012). If the first named applicant has his residence or place of business in a UPC member state, the law of this specific member state is applicable. If this is not the case, the domicile and place of business of the subsequent applicants are decisive. However, if this does not apply to any of the patent's applicants, the law of the state in which the European Patent Organization has its seat, i.e., German law, would apply (Art. 7(3) of Regulation (EU) No. 1257/2012). These member state specific co ownership statutory law cannot be contractually overruled, and therefore, the order of applicants and thus the choice of law applicable to the patent must be carefully considered.

(iii) Strategic considerations

So, against the background above, how should contracting parties now proceed when reviewing their contracts and re-considering the current contractual language?

Existing contracts (licensing agreements, R&D collaborations and co-ownership agreements) should be reviewed to determine whether there is any need for adaptation. In particular, it should be evaluated whether the aspects mentioned above are already adequately covered. If any need for adaptation is identified, it should further be assessed whether the respective negotiation position (be it as licensee or licensor) provides for sufficient room to re-negotiate the agreement. In view of the fact that the UPC already started its work on 1 June 2023, the individual contractual adjustments should in any case be made as soon as possible to avoid any unintended consequences and implications. Finally, it is recommended to implement internal guidelines for handling such contractual issues to have company-wide guardrails in place to ensure a consistent contract management.

Key issues

  • The power to opt-out (and, inversely, to opt-back) is granted to the patent proprietor under the UPC. The exclusive licensee will in turn have a legitimate interest in having this decision-making authority contractually delegated to him.
  • In general, the rights of co-owners in relation to the proprietary aspects of the patent, and hence the law applicable, e.g. with regard to co-ownership matters, will be determined by the order of applicants in the patent register
  • The exclusive licensee is entitled under the UPC to bring its own action for infringement of the licensed patent. This in turn raises the risk of a nullity attack by the opposing party with effect for all UPC member states or a blocking of the opt-out (or opt-back) which represents another area that requires contractual reflection and consideration.
  • In case of multiple patent owners, a request for unitary effect and opt-out (or opt-back) can only be filed jointly.
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