Are your contracts UPC ready? Key risks to consider

This article was written and published before the opening of the UPC on 1 June 2023.

The introduction of the Unified Patent Court (UPC) and Unitary Patent (UP) is the biggest shake-up of the patent system in Europe for 50 years. It will radically change the landscape for patent risk in Europe. With Germany's deposit of its instrument of ratification of the Agreement on the Unified Patent Court (UPCA) on 19 February 2023, the UPC and UP system will now start to operate from 1 June 2023. This means that the UPCA will enter into force, and that the two EU Regulations setting up the UP will apply from that date. The sunrise period for opt-outs of classic European Patents (EPs) began on 1 March 2023 and since 1 January 2023 the European Patent Office (EPO) has already started to accept early applications for unitary effect.

Much of the discussion to date has focused on prosecution strategy for patent applicants and litigation strategy, both from the perspective of a patent holder and of a third party infringer. However, the introduction of the UPC and UP has major implications for patent holders who license-out their patent rights, businesses who rely on in-licensed patents, and co-owners of patents.

Not just an issue for patent holders and potential infringers

This article focuses on how that impact can be managed in well-drafted patent licence clauses and co-ownership clauses (and in the wide range of commercial agreements in which patent licence clauses and co-ownership clauses are embedded, including collaboration agreements, joint development agreements, sponsored research agreements, licence, development and commercialisation agreements). We will consider the practicalities of how to implement a review programme to triage your existing key IP agreements and templates in our next article.

New issues for patent licence clauses and co-ownership clauses

Various new issues arise as between licensors, licensees and co-owners.

As a preliminary comment, a patentee which has developed a strategy regarding the UPC and UP for its solely-owned patents that are not subject to a licence-out will have considered many of these issues already in that context. Such a patentee is likely to want to adopt a consistent position regarding its co-owned or out-licensed patents, and this is likely to be its staring point in any negotiations with co-owners or licensees.

Should a licensee or co-owner be given standing to bring infringement proceedings in respect of the licensed patents?

• In addition to the patent proprietor of a UP or a (non-opted out) EP, the default rule is that an exclusive licensee has standing to bring an infringement action in the UPC, provided that the licensee informs the proprietor accordingly. However, a licence agreement can expressly exclude such standing.
• The default rule is that a non-exclusive licensee does not have standing to bring an infringement action in the UPC. However, such standing can be conferred on even a non-exclusive licensee by express words in the licence agreement.
• In either case, the patent proprietor is entitled to join the action brought by the licensee. However, it is not obliged to do so.
• Interestingly, the validity of a patent cannot be contested in an action for infringement brought by a licensee where the patent proprietor does not take part in the proceedings. In that case, the defendant in an action for infringement wanting to contest the validity of a patent will have to bring a separate revocation action against the patent proprietor.
• The question of the extent to which a licensee who only has a territorially-limited licence can obtain a UPC ruling for all UPCA contracting states seems to be unresolved to date. However, there is a significant risk of spill-over effects outside the licensee's territory. Article 34 UPCA provides that "Decisions of the Court shall cover, in case of a European patent, the territory of those Contracting Member States for which the European patent has effect". This is one of the key foundational principles of the UPC. This means, for example, that an injunction obtained in a successful infringement action brought by a territorially-limited licensee may well take effect throughout all UPCA contracting states, even in territories reserved to the licensor or granted to another exclusive licensee. Certainly, a revocation action brought by the alleged infringer would, if successful, result in revocation of any licensed UP in its entirety or, as regards a licensed EP, revocation of all designations of the licensed EP covered by the UPC, even in territories reserved to the licensor or granted to another exclusive licensee. So a patent proprietor granting a licence for only some (but not all) of territory of the UPCA contracting states should consider carefully whether even an exclusive territorially-limited licensee should be given standing to bring infringement actions. Compared to the pre-UPC era, a patentee is much less likely to be willing to do so (and likely to want to amend any existing territorially-limited licences in this regard).
• Regarding a co-owned UP, the default rule on standing is that the national patent law which governs the UP as an object of property (see the "Which co-owner should be named first in a joint EP application" section below) will determine the standing of an individual co-owner to bring an infringement action against a third party without the consent of all other co-owners (and any liability of a non-participating co-owner to court fees and an adverse costs order). As regards a co-owned EP, the default rule seems also to be unresolved. The UPC rules are silent on the point, so the UPC is likely to have to develop its own approach. In the interim, this emphasises the importance of co-owners expressly agreeing the position between themselves.
• Where a licensor or co-owner has been willing historically for its licensees/co-owners to have standing to sue in national courts, it may be willing to take the same approach regarding standing in the UPC. However, some licensors may want to take a more restrictive approach in the case of the UPC, on the basis that it is an untested court with no existing body of case law. So, whilst it would be unusual for a typical enforcement clause to distinguish between different fora as to whether a licensee or individual co-owner has standing to sue, that may be an approach worth considering at least for a transitional period whilst a patent proprietor builds familiarity and confidence with the operations of the UPC.

Control over opt-out of classic EPs (and withdrawal of opt-out)

• Starting in the sunrise period (1 March 2023 to 31 May 2023), and continuing for the seven year transitional period that begins on 1 June 2023, an EP or European patent application can be permanently opted out from the jurisdiction of the UPC. The effect of opt-out is to give the national courts exclusive jurisdiction for each respective national validation of an EP until expiry, just as it would have without the UPC. The opt-out of an EP also has the effect of automatically opting out any future supplementary protection certificates (SPCs) which might be based upon it.
• An EP which has not been opted out could be the subject of a revocation action in the central division of the UPC, which if successful, would result in revocation of all designations of the EP covered by the UPC. This in turn could result in significant reduction or complete loss of royalty payments to the patent proprietor. Conversely, an EP which has been opted out cannot be enforced in a single infringement action across the whole breadth of the UPC territory. Instead, infringement actions in the national courts will need to be brought, as now.
• An opted out EP can potentially be opted back into the UPC system by withdrawing the opt-out (providing it is not, or has not been, the subject of national litigation) For further details, see the "Should a licensee/co-owner be entitled to bring infringement proceedings in the UPC without patentee's consent?" section below. 
• Whether to opt out (or withdraw an opt-out), and if so, when do to do so, is therefore a critical tactical decision. The ability to control such decisions is important. As between a licensor and licensee, close attention will therefore need to be paid to who controls these decisions. Similarly, co-owners will need to review their rights regarding patent strategy to determine how the decision regarding opting out will be made.
• For an opt-out to be effective, an opt-out application must be lodged at the UPC Registry (via the UPC Management System) by the proprietors of all designations of the EP (assuming that these are different or there are co-owners). Curiously, this includes designations in EPC Contracting States which are not participating in the UPC system. Likewise, the holders of all SPCs which have been granted as of the date of the opt-out must also join in the opt-out application for it to be effective.
• "Proprietor" here means the actual legal and beneficial owner of the EP, not the registered proprietor.
• A licensee has no standing to file an opt-out. A licensee (or an individual co-owner) who wishes to exercise control over any such decisions would need to ensure that the licensor (and/or its fellow co-owner, as the case may be) is contractually obliged to assist it. Where the licensed patents are jointly owned, a licensee may also wish to ensure that it is able to directly (if the joint owners are the licensors), or through the licensor, require the co-owners to always comply with the licensee’s request to opt out or withdraw the opt-out (and not opt out or withdraw an opt-out without the licensee’s consent). If a licensee's bargaining position is not strong enough to achieve this level of control, it may instead seek the right to be consulted by the licensor before any opt-out is requested (or withdrawn), and to have its representations considered fairly and taken into account. 
• Filing an opt-out request (and withdrawal of an opt-out) is one of the few actions a proprietor can take for itself, without appointing a professional representative. However, to do so, the proprietor will need to have set up a user account on the UPC Case Management System (CMS) and enrol using the CMS' strong authentication system (which involves obtaining an electronic identification certificate compliant with EU Regulation No. 910/2014 from an authorised party provider). Securing an effective opt-out is also dependent on the error-free operation of the UPC's CMS itself, which is largely untested at scale. 
• An opt-out will be barred if a revocation action concerning the EP has been commenced in the UPC by a third party prior to the date on which the opt-out request is lodged, even after that action has finished.
• As evident from the above, achieving an effective opt-out is not necessarily straightforward. It may require significant work by the licensor/individual co-owner and it may not be entirely under the licensor's/individual co-owner's control. In the circumstances, a well-advised licensor/individual co-owner is unlikely to be willing to accept an absolute obligation to opt out licensed patents upon request by the licensee. The most it may be prepared to accept is a reasonable efforts obligation to achieve an opt-out.
• A licensee who wishes to exercise control over opting out may accept such a reasonable efforts obligation, but in return may ask for robust warranty protection from a licensor/individual co-owner relating to opting out. A well-drafted patent licence is likely to already include a title warranty from the licensor (unless, perhaps, the licensor is a university). If your existing licence agreement does not already include a title warranty, this should be the starting point for the negotiation. More extensive warranties which a licensee might request include: that the warrantor is either the sole legal and beneficial owner of the EP free from encumbrance, that, if co-owned, the identities of all other co-owners and SPC holders are known to the licensor/individual co-owner and they are easily contactable and have undertaken to the licensor/individual co-owner not to dispose of their interest in the co-owned EP or SPC in question without providing written notice, that the EP register is up to date and the licensor has checked and verified the chain of title, and that a common representative has been appointed by all the co-owners and SPC holders for the purposes of an opt-out.

Control over whether to seek unitary effect?

• A UP is an independent patent right which exists in addition to national patents and EPs and has uniform effect in all participating UPC countries. A key benefit is that a UP does not have to be validated post-grant in each participating UPC country, and renewals are handled centrally too by the EPO. This could result in significant cost savings in certain situations, compared to an EP with broad country coverage. UPs can only be transferred, amended or revoked simultaneously for all countries in which they have effect.
• Central revocation of a UP could lead to significant reduction or complete loss of royalty payments to a licensor. This will be of concern to licensors, who may prefer an opted out EP as opposed to a UP, as various individual national courts are likely to be slower in revoking the national patents than the UPC (which could extend the royalty term). Potentially those courts may reach different decisions (again, preserving some royalty income and minimising the risk of an all-or-nothing outcome). Therefore, to the extent that control of patent prosecution in a key current licence agreement is in the hands of the licensee, a licensor may wish to review their licence to ascertain whether the licensee is required to consult or seek the licensor’s approval on any aspect of patent prosecution - including decisions about geographical coverage.
• As mentioned above, the UPC is an untested court with no existing body of case law - in particular regarding patent revocation/nullity and the effectiveness of the Court of Appeal in scrutinising decisions of the first instance divisions. For this reason, until licensors become comfortable with the approach of the UPC, they may seek ways to limit any step-down in royalties resulting from central revocation of a UP comprised in the licensed patents (subject to competition law difficulties).
• There are also other reasons, beyond central revocation, why a licensor may want greater control over the decision to file for a UP, such as the UP countries being broader than the territory licensed. Also, a UP is a single asset that can’t be partially assigned or left to lapse in some countries but not others, which reduces flexibility (and potentially increases cost) for the licensor – in particular in the event of termination of the licence - compared to a bundle of national rights which can be assigned or left to lapse individually.
• Central revocation may also be of concern to an exclusive licensee wishing to avoid the risk of losing market exclusivity across all UP designated states in Europe (which would be the case if a UP was revoked). Such exclusive licensees may want to include provisions which would require some level of co-operation between the licensor and licensee on decisions whether to obtain indivisible UPs or bundles of national European patents, and step-in rights if the licensor decides to let a UP lapse at a later date.
• Moreover, new UPs must be litigated in the UPC from the beginning of the new system and cannot be opted out.
• This creates a new interplay between control over prosecution and maintenance of the licensed patents (including seeking unitary effect) and control over enforcement proceedings. Prior to the implementation of the UPC and UP, these have been independent issues, de-coupled throughout the territory of the licence. Control over prosecution and maintenance of the licensed patents could be allocated to one party and control over enforcement to the other party, without irreconcilable tensions arising or the position between unworkable. Following the implementation of the UPC and UP, the position is more nuanced. The risk of the decisions of one party trumping the decisions of the other party is significantly greater, and so there is likely to be greater pressure to keep control over both types of issues in the hands of just one of the parties.  

Should a licensee/co-owner with standing be entitled to bring infringement proceedings in the UPC without the patentee's consent?

• An opt-out will be barred once an action concerning the EP has been commenced in the UPC, even after that action has finished. Conversely, withdrawal of an opt-out will be barred once an action concerning the EP has been commenced in a national court, even after that action has finished.
• For this reason, a licensor who wants to have control over opt-out of the licensed patents (and withdrawal of an opt-out) may be unwilling to confer on its licensee standing to bring infringement proceedings (whether in the UPC or national courts). Or where it confers such standing, it may require the licensee to give prior notice to the licensor of any proposed infringement actions and only to proceed to file them upon receipt of written consent from the licensor. 

Which co-owner should be named first in a joint EP application?

• A UP is considered to be an object of property under the law of the member states in which the applicant has its seat or a place of business at the time of filing the application, provided that this member state already participates in the UP system. 
• Otherwise the object of property is governed by the law of the state in which the EPO has its seat, which is Germany (Munich). Hence, for the very large percentage of potential applicants who have neither their seat nor an office in one of the participating member states, German law is applicable for all questions in a property law context.
• The exact list of issues which would be determined by the law governing the UP as an object of property is not completely clear, as it is not listed in any of the legislative instruments setting up the UP. However, based on first principles, it is thought to include all of the following: whether an individual co-owner of an UP has standing to bring an infringement action in the UPC without the consent of its co-owners, assignment of the UP and transfer by operation of law, licensing, and granting of security interests in the UP and treatment on insolvency of the UP holder and entitlement.

Some commentators have also suggested that the law governing the UP as an object of property would also determine any obligation to pay possibly additional remuneration to employee-inventors. However, this seems doubtful. The place of invention (or possibly the place of employment, if different) is generally the key criterion in determining any entitlement for an employee-inventor to receive additional remuneration.

Some of these national law rules will be default rules which can be disapplied by an agreement to the contrary between the parties (for example, in a well-drafted co-ownership clause). Other rules will be mandatory (for example, the formalities which must be observed for a valid assignment or licence), and the parties will not be able to depart from them even by way of agreement. 

• Where two or more co-owners have their seat or place of business in participating member states, it is the law of the member state in which the first-named applicant has its seat or place of business which will govern. In some circumstances, a sophisticated party may wish to provide in its co-ownership clauses that it will be first-named in any joint patent applications.
• Note that the governing law of a UP is determined as of the date of filing the EP application (ie several years prior to filing the request for unitary effect) and is fixed for the lifetime of the UP. It will be entered on the European Patent Register and will not change even if the UP is subsequently assigned.

For answers to common questions about the UPC and UP, we have created a Q&A guide – available here. If you'd like to discuss a triage programme for your key agreements, would like advice on how to update your template licence clauses and co-ownership clauses, or have any other questions about getting your contracts ready for the UPC, please contact the authors of this article or any member of our UPC group.

A wide range of more detailed briefings and insights from the international Taylor Wessing UPC Group are also available on our UPC page.