Patents as the New China Trade Regulation Instrument

The common opinion is that the WTO Doha negotiations have failed to accelerate global free trade. However, it is also clear that the commitments accepted by WTO members will ultimately reduce traditional trade barriers such as import duties, quota etc. Specifically for certain technology based sectors (such as ICT products, semiconductors, pharmaceuticals and telecoms) commitments in relation to the reduction of trade barriers such as tariffs are way ahead of the generally agreed pace of tariffs-reduction agreed in the WTO.

Nevertheless, regional markets such as the EU and the US (NAFTA) will retain an interest in (at least the possibility) to maintain trade barriers. As far as the trade in goods is concerned, these will follow the tradition patterns of levies, duties, minimum safety standards for food etc. However, such barriers are restricted by the WTO commitments of states and markets.

An interesting “mega trend” is the emergence of intellectual property as a trade regulation instrument. There is a good reason why for example the level of IP protection is a continuous topic in trade discussions between the US and China.

China’s position as the “world’s workshop” is based on a significant advantage with regard to manufacturing cost. Generally, one could say that the west has lost the manufacturing game. Chinese made products compete with European and American products on the respective markets.

Although much of China’s current production of technology based products is still originating from the west outsourcing manufacturing, many Chinese operators are leaving the OEM model behind and start introducing their products under their own brands in western markets. Examples are companies like Haier, Huawei and Lenovo.

Traditionally, the influx of cheap products has been countered by safeguards and anti-dumping duties, but these instruments and their application are restricted by WTO agreements. Although they temporarily can reduce the difference in price between local made and foreign products, they do not resolve the difference in the long run.

The discussion between the US and China on IP seems to focus in particular on counterfeiting and the alleged lack of IP protection in China. A closer look, specifically in relation to technology products and patents however, reveals a more complex agenda.

Western economies are knowledge based. There is a long tradition of transforming R&D efforts into patents. This is different in China. Accordingly, in many tech sectors, Chinese companies who want to enter the western market need to license-in technology for their products. The royalties payable under such agreements can significantly increase the basic cost of such products. This reduces the competitive advantage for Chinese exporters which currently mostly is based on lower manufacturing cost. And that provides interesting possibilities to regulate the influx of Chinese products.

The difference of course is that rather than for example import duties, royalties are payments to private enterprises. However, increased royalty payments do not benefit the recipients alone, but also their governments. They increase corporate taxation revenues and contribute to growth and facilitate more jobs. Also, they can assist in restricting market access to foreign products. And being a private sector issue, the commercialization of patents and licensing policies are not restricted by WTO commitments. Rather, TRIPS imposes minimum levels on WTO members than restrictions on their policies.

On the other side, there are signals which seem to confirm that China is quite well aware of this agenda. China of course has a vast internal market which offers significant opportunities for western companies. And by establishing its own standards such as the EVD standard for DVD, and its 3G telecoms networks, China introduces technology as well as IP based barriers for market access.

So the outlook may well be that patents and standards are taking over the role of traditional trade regulation instruments. An interesting convergence for patent and trade practitioners.

To be continued

German stem cell patent revoked

In a decision announced on December 5, 2006, the German Federal Patent Court (“Bundespatentgericht”), in a nullity action, has partially revoked the German patent DE 197 56 864 directed to neuronal or glial precursor or stem cells. The Court based its decision on § 2 (3) No. 3 PatG where it is laid down that German patents shall not be granted in respect of biotechnological inventions which concern uses of human embryos for industrial or commercial purposes. Interestingly, the claims of the patent are not directed to such uses. However, in the hearing, according to press reports, the Court stated that, for obtaining the stem cells, it had been necessary to destroy human embryos, and this was also contrary to the regulations of § 2 (3) No. 3 PatG. The written decision is not yet available, but it will be interesting to see how the judges will justify their position. After issuance of the written decision, the patentee will be allowed to file an appeal to the German Federal Supreme Court.

This decision of the German Federal Patent Court will also have some impact on a comparable case pending before the Enlarged Board of Appeal of the European Patent Office. In fact, already on November 18, 2005, the Technical Board of Appeal 3.3.8 has referred in the case T 1374/04 inter alia the following question to the Enlarged Board of Appeal: “… does Rule 23d(c) EPC [the regulation corresponding to § 2 (3) No. 3 PatG in Germany] forbid the patenting of claims directed to products (here: human embryonic stem cell cultures) which – as described in the application – at the filing date could be prepared exclusively by a method which necessarily involved the destruction of the human embryos from which said products are derived, if said method is not part of the claims (emphasis added)?. Thus, with respect to that question, the Enlarged Board of Appeal is charged with the same question which has now already been answered in a national law suit in Germany.

It is presently not clear when the decision of the Enlarged Board, which will be the final one for examination or opposition proceedings at the European Patent Office, will be issued. Even more, it is, at present completely unclear how the Enlarged Board will decide. Inter alia, the issue is whether the regulations of the EPO have to be interpreted narrowly or not. In the case G 1/98, which concerned the scope of the exclusion of plant varieties from patentability under Art. 53 (b) EPC, the Enlarged Board arrived at a narrow construction by finding that this article does allow claims covering plant varieties, unless a specific variety is not mentioned in the claim.

Furthermore, in case that an appeal will be filed in Germany, it will be interesting to see whether the German Federal Supreme Court will wait for the decision of the Enlarged Board and follow this decision. In the past, in unrelated matters, the German Federal Supreme Court has stated several times that they consider decisions of the EPO very seriously, but that they are free to make their own decisions. Especially with respect to novelty, the German Patent Supreme Court has established principles of law which deviate from the practice of the EPO and of its Technical Boards of Appeal.

Dr. Fritz Lahrtz (Isenbruck Bösl Hörschler Wichmann Huhn, Munich, Germany)

See also: "The patenting of biotechnological inventions involving the use of biological material of human origin", German National Ethics Council and "Optionen bei der Umsetzung der Richtlinie EG 98/44 über den rechtlichen Schutz biotechologischer Erfindungen", Swiss Federal Institute of Intellectual Property.

UK: Gowers Review published, on IP policy review

In the UK the so the “Gowers Review” has at last been published as part of UK Finance minister Gordon Brown's pre-budget review, which finished a short while ago. Some of the key recommendations include a recommendation for a fast track registration system for trade marks to allow marks to be examined and accepted within 10 days of the application being filed. Although there are some interesting recommendations in many areas, they remain, of course, recommendations only at this stage. The Review aims to ensure the correct balance in IP rights and to foster competitive and innovative markets strengthen enforcement of IP rights (particularly to protect the UK's creative industries from piracy and counterfeiting for the benefit of consumers) and to provide support for businesses using the IP system.

The main recommendations for patents are:

• Recommendation 1: Amend section 60(5) of the Patents Act 1977 to clarify the research exception to facilitate experimentation, innovation and education. (page 51)
• Recommendation 22: Maintain a high quality of patents awarded by increasing the use of "section 21" observations: streamlining procedures and raising awareness. (page 88
• Recommendation 25a: Introduce accelerated grant process for patents to complement the accelerated examination and combined patent search and examination procedures. (page 90)
• Recommendation 30a: The Patent Office should publish and maintain an open standards web database, linked to the EPO’s esp@cenet web database, containing all patents issued under licence of right. (page 94)
• Recommendation 30b: The Patent Office should publish and maintain an open standards web database, linked to esp@cenet containing all expired patents. (page 95)
• Recommendation 23: The Patent Office should conduct a pilot of Beth Noveck’s Community Patent Review in 2007 in the UK to determine whether this would have a positive impact on the quality of the patent stock. (page 90). Such a review is is intended to harness the collective knowledge of experts through the internet in order to help patent examiners find the right citations. The public is invited to submit prior art via a webpage, which can then be rated by the community. The aim is to ensure that bad patent applications are not granted and to narrow claims in applications in order to narrow the scope of protection.
• Recommendation 25a: Introduce accelerated grant process for patents to complement the accelerated examination and combined patent search and examination procedures. (page 90)
• Recommendation 17: Maintain policy of not extending patent rights beyond their present limits within the areas of software, business methods and genes. (page 80)
• Other Recommendation refer to support for the establishment of a single Community Patent, the EPLA and the London Agreement (as an interim step towards COMPAT, and as an improvement in its own right).
  

Lower standards for patentability in the US?

In an earlier blog (“Undesirable Software Patents and the US case KSR vs. Teleflex”) we reported on the case KSR vs. Teleflex. This is not just a patent case, it has wider implications, also for Europe. If the plaintiff gets its way obtaining a patent in the US will be harder. The treshold for patentability (also - and most likely foremost - for software patents). Also at stake is what seems like a more critical approach by the US Supreme Court towards the highest patent court in the US, the Court of Appeal for the Federal Circuit in Washington, DC (“CAFC”). The CAFC seems to want to bring greater predictability to patent law issues, but this predictability comes at the expense of compromising complex issues. The Supreme Court flatly rejects the CAFC’s attempts at “bright line” rules.

The obviousness test, currently debated in this case, is of crucial importance for future patent grants. The test is used to prove that a person of ordinary skill in the art would combine earlier findings in the same manner claimed in the patent. A change in use of the test would constitute one of the biggest changes to IP law in a generation. If the obviousness test as applied by the CAFC is dropped, the challenges to existing patents and pending patent applications will have a significant impact on the practice of patent law, including an increase in challenges to licensing agreements and settlements.

Yesterday, parties held their oral argument before the court. The transcripts of the hearing can be found here.

See Prof. Hal Wegner's "same day analysis" of the hearing.
See also: “Supreme Court: Current Test of Obviousness is "Gobbledygook”, Patently-O blog.

Reach Trough Claims in Europe, opportunities for a patent troll?

Biotech is R&D intensive, so research tools are a crucial element in this industry. It is not surprising that inventors who have found a new tool to do the expensive research are looking for ways to expand the reach of their tool invention. One way of doing so is to claim that the invention (the research tool, that is the composition or method to do experiments) is not only useful in conducting those experiments, but also in establishing what the result of this research will be, even if one does not know the outcome of this research as yet. Regularly this is referred to as “upstream” research to cover also the “downstream” results of that research. If the inventor of such an “upstream” research tool – such as cell lines, monoclonal antibodies, expression systems etc. - seeks patent protection he wants more than just freedom to operate the initial or “upstream” research tool .

The patentee wants to “reach through” the results of the use of this patented tool to also claim inventions not yet made by him. In claiming his invention he formulates “reach-through claims” which go beyond what he has actually discovered and which he described in detail in the patent specification. The claims extend to generally foreseeable products discovered through use of the invented search tool. The “reach-through” products are identified only by reference to the material or assay used to find or identify them, but they are not described specifically. An example of such a “reach through” is when someone discovers a new protein which might be suitable for use as a drug target. He is not satisfied to obtain protection only for the isolated drug target and methods of screening for drugs which act as inhibitors or agonists (as appropriate) for that drug target. He also wants to obtain explicit protection for all drugs which act as inhibitors or agonists for that drug target. Or in case of a drug screening process, the party who discovers such a process may wish to claim all drugs discovered through that process.

Needless to say that this “reaching through” practise evokes a great deal of excitement, and, as a result, litigation. The key issues is that such reach through patent claims on a downstream product are not automatically rendered novel and inventive simply because it has been discovered through a novel and inventive upstream process. One of the more recent and well known patent fights relate to such a patent: Ariad Pharmaceuticals et al v. Eli Lilly and Company.

What happened? Researchers identified a so called NF-kB signaling biological pathway. Rel or NF-kappaB (NF-kB) proteins comprise a family of structurally-related eukaryotic transcription factors that are involved in the control of a large number of normal cellular processes, such as immune and inflammatory responses, developmental processes and cellular growth. These transcription factors are active in a number of diseases such as cancer, arthritis, chronic inflammation, asthma and heart disease.

A jury found in May 2006 that the US patent (nr. 6, 410,516) that covered the research tool (the Nf-kB signaling pathway), owned by Harvard, the Massachusetts Institute of Technology, and the Whitehead Institute and which was licensed to Ariad Pharmaceuticals, was valid and infringed by Lilly's sale of two products, Evista® and Xigris®. The patent, expiring in June 2019, covers disease treatment methods that affect the NF-kB pathway. The question at stake was if Lilly’s drug was acting on the patented pathway (the research tool) while the drug already existed before the pathway was discovered, would this prior existence of the drug invalidate the patent on the pathway by rendering it not "new", or “novel”? The Ariad patent tried to “reach through” the Eli Lilly drug. If that is allowed, a previously “patent free” drug can all of a sudden be “reached” by a new research tool, as in this case the Nf-kB signaling pathway.

It is a hotly debated issue, for obvious reasons: if the patent is held to be novel, than this research tool becomes a money blockbuster in the hands of the patentee, who can then extend, or reach through, his invention to all molecules and compounds made as a result of the patented research tool. The licensing income would be enormous.

Could Europe have a “Ariad” like outcome as in the US?

Would the “reach through” practice be a viable option in Europe? If so, why would any patent troll not obtain the license rights (or even the European equivalent of the US patent) to this research tool?

European counterpart of the Ariad patent, EP 0407411 B1 (priority 01.03.1988)reads in granted claim 1:

“A method of altering expression in a cell of a gene whose transcriptional activity is altered by binding of nuclear factor kappa B (NF-κB) to the enhancer of said gene, comprising introducing an agent which controls dissociation of the nuclear factor kappa (NF-κB—IκB) complex present in the cytoplasm of said cell”

In many European countries the patentee of such a patent, in order to be successful in an infringement case against a “Lilly” type company would have to rely on the section in the EU patent laws relating to infringement by product of a process to establish an infringement claim. As to validity, the requirement that an invention claimed in a European patent must be both novel and involve an inventive step applies to reach-through claims in the same way as conventional claims. A claim to a downstream product is not automatically rendered novel and inventive simply because it has been discovered through a novel and inventive upstream process.

Another issue which is particularly relevant in Europe results from the European approach to evaluating inventive step. The presence of an inventive step is determined by considering the objective technical problem (derivable from the patent application) to be solved by the claimed invention. If an inventive screening process may be used to discover new drugs, then in order to have any prospects of obtaining protection for the potential drugs, a patent application should discuss the problems to be solved by the potential drugs, not just the problems solved by the screening process.

In the United Kingdom it is likely that reach through claims are vulnerable to sufficiency attacks. Following the Court of Appeal’s decision in American Home Products Corporation v Novartis Pharmaceuticals UK Ltd, such claims may be treated as mere invitations to carry out a research project. Unless the patentee has identified and characterized specific compounds using the assay, the court may well find that there are too many uncertainties involved in identifying such compounds to allow the scope of the patentees monopoly to cover any compound identified using the patented assay.

The answer to the European outcome of an Ariad equivalent patent attack remains uncertain. This European “terra incognita” could bear interesting potentials for anyone with a big purse and a cool head.

sources:
(1) Andrew Christie, Amanda Lim, Reach-through Patent Claims in Biotechnology: An Analysis of the Examination Practices of the United States, European and Japanese Patent Offices, University of Melbourne Research Paper No. 176, Intellectual Property Quarterly, Vol. 3, 2005
(2) Hindle Lowther, Reach Through Claims, Chartered Patent Agents, registered trade mark agents and European patent attorneys, Edinburgh, Scotland
(3) Rochelle Seide, Michelle le Cointe, Reach-Through Claims: How far may your patent extend? Baker Botts LLP
(4) Johan Brants, De Clercq, Brants & Partners, Gent, Belgium, Reach Through Claims and SPC's (see on the right side of this IPEG blog under "IP Presentations"

EIRMA on Booz Allen study on R&D spending

The conclusions from the Booz Allen Hamilton study - as mentioned in yesterday's post on this blog ("R&D spending doess not necessarlity increase profits") are quite in line with the points I make in public events. However, the Booz Allen study is often being misquoted, and one needs also to understand the context in which the DTI study is being prepared. The BA study does demonstrate that companies need to manage their investment on R&D as part of an overall effective innovation process. So when people quote as its conclusion that there is 'no correlation with performance', this is misleading.

The study simply demonstrates that throwing more money at R&D without attention to the rest of thechain will be ineffective. Ditto throwing less money at it. There is a sweet spot which is strategy dependent. The UK DTI scoreboard is a 'straight down the line' tabulation from companies' accounts. It is an important reference document, as the alternative national statistics do not break the figures per company. (The DTI figures are highly misleading if looked at 'per country'.)

Taken together, national and company statistics are helpful in trying toget a sense of what is going on. The DTI's main headline this year, which is that countries face a historic sector bias, was pointed out by EIRMA in 2001/2002. It has taken five years for most policy people to accept this. Second point about the UK scoreboard is to understand that it is part of an on-going process to get many companies to understand that R&D *at any level* matters as part of a robust business strategy. In that sense, I'm prepared to live with a certain ambiguity and slight overstatement.

Andrew Dearing, EIRMA (European Industrial Research Management Association)

R&D spending does not necessarily increase profits

Companies spend billions of dollars on R&D to boost innovation output in the expectation of increasing profitability. From a study publised today by Booz Allen Hamilton, “Smart Spenders: The Global Innovation 1000“, it appears that it is not as easy as that: R&D spending does not necessarily increase profits. Booz Allen Hamilton’s annual study of the world’s 1,000 largest corporate R&D budgets uncovers a small group of high-leverage innovators who outperform their industries. Financial Times, claims it undermines repeated calls by governments in the UK and Europe for more corporate investments to close the transatlantic technology gap with the US. The Booz Allen Hamilton study, to be published in “strategy+business” seem to come to opposite conclusions as the DTI Scoreboard 2006, a study recently published by the UK Department of Trade & Industry (DTI).

However, the Booz Allen and DTI studies use different methodologies to rate R&D spending and its effects. Booz Allen conducts a more detailed analysis of the financial performance of the world’s leading R&D spenders to find the linkages between spending on innovation and corporate performance. This allows Booz Allen to identify the companies that outperform their competitors by getting better results from their innovation investment.

Both studies find increased R&D investment by the companies that spend the most on R&D spending. However, the Booz Allen study reports that revenues rose at an even faster rate.

Indeed, the most meaningful indicator of innovation investment, R&D spending as a percentage of sales, has decreased steadily since 2001, and by that measure, only 40% of the companies actually increased their spending rate in 2005.

Most importantly, the two studies examine the link between R&D and performance at different levels.

• The DTI study shows that R&D-intensive industries, such as software, have higher market capital and grow share price faster than industries, such as chemicals, that spend a lower percentage of sales on R&D. This does not mean, however, that one software or chemical company spending more on R&D than its competitors will therefore enjoy higher financial results.

• By contrast, the Booz Allen study focuses on companies, and finds no relationship between R&D spending and the primary measures of corporate financial performance. By indexing R&D spend within industries, Booz Allen eliminates Wall Street bias of one industry over another and are able to examine performance drivers within and across industries. High leverage innovators such as Toyota and Apple stand out for their effectiveness as innovators, even when spending less on R&D than their competitors, both in percentage and absolute terms.

In the end, both studies agree that return on innovation investment depends on the effectiveness of a company’s innovation processes and organization, rather than the magnitude of its R&D spend (“Money doesn’t buy results”). A business also needs to make good strategic choices, demonstrate operational excellence and balance its R&D investment with investment in areas such as market development and design for production.

European Patent Judges agree on rules and procedures for new EU Patent Court

Twenty six patent judges from all over Europe gathered in San Servolo, Italy, for the second time to discuss and decide on rules and procedures for the EPLA court, the first centralized European Patent Court. After meeting for a week all 26 judges agreed and signed a Resolution ("Second Venice Resolution"), approving new rules how to conduct the procedures in this newly to be established EU patent court. The Rules deal with all aspects of patent litigation, from how to start the litigation to case management, the way oral arguments will be heard and which protective measures can be ordered by the court, and much more.

The unanimous vote in favour of Uniform Rules of Proceedings is a striking result, as it is quite a challenge to get Europeans to decide on anything so far reaching as how to litigate under uniform principles. Most of the EU countries have their own rules of procedure which differ substantially. One can imagine how difficult it must have been to agree on rules that could work for all European states that will eventually participate in the EU court.

The judges’ choice seems to be made for an EU patent court modelled after a continental European, rather than the UK judicial system.

Bloomberg cites Kevin Mooney, the President of the European Patent Lawyers Association (EPLAW), which organized the judges conference:

"What the judges are saying to the politicians is to get on with it. If the
European Commission supports it and if the European Parliament supports it, then
we could see a patent court within three years."

The unity within the judiciary is the more prominent in comparison with the deep divides among politicians, as was reported in our earlier post. It remains to be seen how much “cloud” the judges have over the legislative process. It surely signals a strong support among practitioners and judges that EPLA and the EU patent court is the only way forward or a united patent enforcement system. Now the politicians must move.

For the 11-page, full text of the “Principles Relating to the Rules of Procedure of the European Court”, click here.

Patent litigation increasingly expensive in Europe

When on November 2, 2006 the US company Garmin - maker of GPS consumer products - and their direct competitor, the successful Dutch company TomTom, received its favorable judgment against TomTom in an IP matter, the District Court The Hague also awarded Garmin with a unprecedented judgment in court fees: €37,000 (US$ 47,000), to be paid by TomTom.

With regard costs, IP litigation used to be almost “risk free” in Europe and especially Netherlands, as the court costs, awarded to the winning party was nominal, in comparison to the actual attorney fees and other trial expenses. Although still small in comparison to US litigation, a litigant in The Netherlands can ask the court to be awarded with the full legal costs incurred. How did that happen and what is there in stock for the future?

The renewed interest in litigation costs originates from the TRIPS Agreement on the Enforcement of IP rights, art. 45 par. 2:

“The judicial authorities shall also have the authority to order the
infringer to pay the right holder expenses, which may include appropriate
attorney's fees. In appropriate cases, Members may authorize the judicial
authorities to order recovery of profits and/or payment of pre-established
damages even where the infringer did not knowingly, or with reasonable grounds
to know, engage in infringing activity.”

As a result, in April 2004 the EU Directive 2004/48/EC (“on Measures and Procedures to Ensure the Enforcement of Intellectual Property Rights”), was adopted. The Directive regulates the measures, procedures and remedies which can be ordered by the competent judicial authorities in case of an IP infringement at the request of an entitled party, among which costs for litigation to be paid by the losing party. (Additionally, it aims to implement further instruments to enforce IP rights, which have been identified as 'best practice' measures in some Member States, which is not the subject this post). The Member States were due to implement the Directive in their national legislations by Spring 2006 at the latest (art. 20 (1). The Directive is still not implemented in all countries (see Overview implementation per October 2006).

Article 14 of the Directive directs the member states to harmonize their legislation on the payment of court costs (attorney fees and other expenses incurred by the successful party). These differ quite substantially (see Bruno Vermeulen in Journal of Intellectual Property Law & Practice, Vol. 1, No. 1).

In Italy, for instance, although the law states that the losing party should pay the costs of the litigation, the courts are reluctant to award payment of the entire sum. Moreover, when the subject matter of the litigation is particularly complex or when the claimant is only partially successful, the Italian court can divide the costs between the parties.

In contrast, the English courts are more inclined to award litigation costs at the expense of the losing party, or they may award costs against a party who has unnecessarily incurred expense by raising futile arguments or causing unnecessary procedures, even if that party wins.

In Germany, costs must be borne by the losing party, but they are strictly calculated according to formal rules, resulting in the so called “Streitwert” of the proceedings.

In Belgium, the Supreme Court allowed the recovery of attorneys’ fees, but it is still unclear how this will be implemented further.

In the Netherlands fixed compensation for administrative costs based on the number of court actions is common in Dutch civil proceedings. In practice, it boiled down to a situation where litigants had to bear their own legal costs.

A change in the way court costs are being attributed is especially helpful for patent owners in smaller jurisdictions like the Benelux where damage awards are usually very low (small market), but where the costs for successful enforcement of a patent may not necessarily be lower than in other, bigger, countries. As a result of the Directive the Netherlands proposed to change its law of civil procedure on court costs as well as other changes proposed under the Directive. Dutch courts are now applying - under art 237 Law on Civil Procedure - the Directive (“horizontal direct effect”) to allow full compensation of court costs in IP matters, rather than a “token” award of costs, as was previously the case. The debate is still going on in Holland how to calculate the actual costs and how to use this in a fair and equitable manner by the courts. In patent litigation the attorney fees are usually far higher than in "soft" IP matters. There are voices that recommend to introduce a similar system as in Germany, court costs are there based on the "value" of the case, or "Streitwert". Soon we may therefor see even larger court costs rewards in Netherlands than the one in Garwin vs. TomTom (which was a design law issue, not a patent infringement case).

As per November 2006 not all EU member states have implemented the Directive in their national legislation. For a full overview on the Enforcement Directive and the way it has been implemented in various EU countries, click here.

Cross Border Relief à-la-US

In Europe we had our time when the Netherlands courts, soon followed by courts in Germany, rendered cross border relief under a European Patent in most of the 90’s. This effort to create a truly European wide enforcement of patents after a uniformed granting procedure, was stalled after the ECJ’s decisions in GAT vs. Luk and Primus et al vs. Roche.

In the US extra territoriality is now also at the heart of a judicial review. On October 27, the US Supreme Court granted certiorari (accepted to hear a case) in the Microsoft vs. AT&T case. In 1984 the US Patent Law (article 35 USC § 271(f) extended infringement liability for the export of unpatented physical components of a patented combination. The current precedent is the “Deepsouth” case in which it was held that making and shipping component parts of a patented combination invention did not constitute ‘making’ the patented invention in the United States. In the pending US case this position will be reconsidered by the US Supreme Court. It will have vast consequences.

see Prof. Harold C. Wegner’s paper “Microsoft Extraterritoriality: “Mutiny…Heresy” where he argues that while the Microsoft case is generally understood in the business press as merely involving whether there is liability for the export of software to be loaded onto original equipment personal computers, this is an oversimplification of the issues. In fact, there are two issues before the Court, Prof. Wegner argues, the first questioning whether software or object code is capable of being a “component” of a patented combination for purposes of the statute, and only in the second instance whether there is infringement liability.

See also the US patent weblog Patently-O.

British Court of Appeal reviews business method and software patents

On October 27, the UK Court of Appeal handed down its judgment in two cases concerning the exclusions to patentability for business methods and computer programs under Article 52(2) and 52(3) of the EPC (s1(2) PA 1977), the first between Aerotel Ltd vs. Telco Holdings Ltd. cs. and the other in the matter of Application Neal William Macrossan.

Mr. Macrossan’s patent application claimed a patent for an automated method of producing and acquiring the documents necessary to incorporate a company, through communication between a remote server and a user. The application for a patent was refused by the hearing officer, on the grounds that it fell within the exclusions from patentable inventions. She concluded that the invention amounted to a method of performing a mental act, a method of doing business and a program for a computer. English case law at the time of the hearing was taken to have established that an invention which at first glance fell within the excluded categories (because it relied on a computer program) could nevertheless be considered patentable if, and to the extent that, it were found to provide a “technical contribution”. For example, a computer program which speeded up the operation of equipment could be considered to provide such a “technical contribution”, and therefore not amount to a computer program “as such”.

The hearing officer concluded that the claimed invention provided no “technical contribution” sufficient to take it outside the excluded categories, rather it “merely reduced cost, labor and error”. Mr. Macrossan appealed this decision to the High Court, where the case was considered by Mr. Justice Mann. Mann J’s only point of divergence from the decision in the Patent Office was his finding that the claimed invention was not excluded as a “method of doing business”, drawing a distinction between methods of carrying out business (excluded) and tools which might be used in a business (not excluded). He stated that “The activity involved in the invention is a business service, or end product, for which the customer is prepared to pay and for which the customer contracts…but that is not what the exclusion in the Act is aimed at, in my view”.

Since the decision of the hearing officer in March 2005, the decisions in CFPH LLC’s Application and Halliburton Energy Services Inc v Smith International (North Sea) Ltd [note] had been taken by some as having altered the approach to be taken by the Patent Office to the application of the exclusions, in particular by de-emphasizing the “technical contribution” element of the test. This approach had apparently been subsequently affirmed in Shoppalotto.com Ltd’s Application and Research in Motion (UK) Ltd v Inpro Licensing SARL.

As summarized by Mr. Justice Pumfrey in the Research in Motion case: “It is now settled…that the right approach to the exclusions can be stated as follows. Taking the claims correctly construed, what does the claimed invention contribute to the art outside excluded subject matter?”. Separately, Aerotel Limited sought to rely on a patent for a pre-paid telephony system, which was attacked on the grounds of excluded subject matter.

The Court of Appeal decision

The Court of Appeal thoroughly reviewed the national and EPO decisions and concluded that “the time has come for matters to be clarified by an Enlarged [EPO] Board of Appeal,” because the existing EPO decisions were contradictory. The Court did not concern itself with political considerations or any views either way as to whether the exclusions were “a good thing”. It noted the broader approach taken in the USA but did not find it a helpful guide. Although there was a “need to place great weight on decisions of the [EPO] Boards of Appeal”, to do so in this area would be premature, the Court felt, given the fact that three distinct new approaches had emerged in the EPO case law, each to some extent in conflict with the others.

The Court therefore suggested that this was a point of law which it would be appropriate for the President of the EPO to refer to an Enlarged Board of Appeal, and the Court ventured to suggest questions to assist the President in formulating the reference. Until such a reference, however, the court declined to follow the EPO cases, considering itself bound by its previous decisions and, in particular, Merrill Lynch’s Application. This meant applying the “technical effect” approach, which it summarized as: “Ask whether the invention as defined in the claim makes a technical contribution to the known art – if no, Art 52(2) applies”, with the ‘rider’ that “novel or inventive purely excluded matter does not count as a ‘technical contribution’”.

It was also agreed that, although there are different reasons for the different exclusions, a common approach can be adopted by applying a four-step test:

(1) properly construe the claim;

(2) identify the actual contribution;

(3) ask whether it falls solely within the excluded subject matter; and

(4) check whether the actual or alleged contribution is actually technical in nature (although this step, required under Merrill Lynch, may be superfluous).

Aerotel was allowed to keep its telephony patent, but Mr. Macrossan fared less well. The Court of Appeal did doubt whether Mr. Macrossan’s invention constituted a method of performing a mental act: “we are doubtful as to whether the exclusion extends to electronic means of doing what could otherwise have been done mentally”, but did not decide that one way or another because it was firmly of the opinion that the invention was both a method of doing business as such and for a computer program as such.

By finding that the invention was a method of doing business, the Court of Appeal disagreed with the High Court Judge, and concluded that drawing a line between excluded abstract methods and tools which might be used in a business was not feasible. In addition, the requirement implicit in Mr. Justice Mann’s reasoning that the exclusion should only apply where what is claimed involves the completion of a business transaction was also overruled, with support being found in the French and German versions of the European Patent Convention.

The Court then went on to apply the re-formulated four step test in light of the business method and computer program exclusions:

(1) the construction of the claim presented no difficulties;

(2) the actual contribution of the inventor – “what he added to human knowledge” – was said to be that “he has thought of…an interactive system which will do the job which otherwise would have been done by a solicitor or company formation agent” and has provided “a computer program (in practice probably an interactive website) which can be used to carry out the method”;

(3) these contributions were considered to fall solely within excluded subject matter: “Mr. Macrossan’s method is for the very business itself, the business of advising upon and creating appropriate company formation documents” and “the contribution is just the devised program up and running”; and

(4) no technical contribution was found: “there is obviously none beyond the mere fact of the running of a computer program”.

Comment

The decision in this case should bring clarity to the approach to be taken by those applying the exclusions in the UK. It has not, however, broadened what is patentable. It is a judgment that appears to be tinged with regret. First, because the Court of Appeal could not itself force a reconciliation of the conflicting EPO authorities, and second because the Court was obliged to apply Merrill Lynch with its emphasis on “technical contribution”. It is apparent that the Court would have preferred to view technical contribution as inherent in the question, “does the contribution consist of excluded subject matter as such?”. In addition, the Court commented that in its view the EPO cases tend to take too generous an approach in relation to computer programs. That is, the Court criticised EPO decisions permitting patents for software recorded on some form of media, indicating that the framers of the EPC meant to exclude computer programs in a practical and operable form, not just in the abstract. The UK Patent Office should now be clear as to the correct test. But this approach may well need revisiting if the EPO Enlarged Board of Appeal does have the matter referred to it.

Nevertheless, even following such a clarification, given the EPO case law (however contradictory in approach) in our view it is unlikely that business methods will become patentable in Europe (as they are in the USA). And the patentability of software inventions in Europe is likely to remain debatable for some time.

Jeremy Morton, Simmons & Simmons, London, UK (see also Simmons IP news alert
[note: see also note Severin de Wit in publication in Dutch IP magazine IER ("Intellectuele Eigendom & Reclamerecht", with Dutch comments.

Second Patent Auction by Ocean Tomo, critical views on auctioning patents

October 25 and 26 the second public patent auction, organized by Ocean Tomo, was held in New York. The first one, in San Francisco on April 5 and 6 had, at best, mixed results. 78 lots of patents ranging from material science, automotive industry, bar code scanners/radio frequency identification (RFID), information technology, to name a few, were among the technologies covered.

In the October 2006 issue of Journal of Intellectual Property Law & Practice (published by Oxford University Press) Dr. Hidero Niioka presents a highly critical view on this new phenomenon. Although patents attract attention as high return on investment opportunities, patents are also notoriously unpredictable to put a value on, Niioka observes. Patents were until recently practically only traded by private dealmakers. Such deals are concluded in negotiations, beyond the public eye. Auctions have surely changed that and have made valuation of patents more visible. Dr. Niioka sees an increased interest in commercialization of IP by IP merchant bankers, brokers and attorney firms. In analyzing the results of the first public auction in April 2006 he concludes that the bidding process was a deception, where it only generated US$ 2,75 million for 24 out of the 78 lots sold. The lowest selling price per patent was about US$ 555, the average price for a patent sold, US$ 30,344, hardly enough to cover the costs of the patent.

In an interesting article dr. Niioka, he described the Gold Rush climate that surrounds patents, exemplary by the RIM vs. NTP, Inc case, that ended in a US$ 621.5 million settlement in favor of NTP, a patent holding company. Niioka signals an “information asymmetry” between the seller and a buyer of patents. IP asset transactions give the purchaser, unlike in an M&A transaction, the chance of a more business and investment relevant information than the seller.

In the last paragraph of his article he doubts whether public auctions, like the one Ocean Tomo organized yesterday and today in New York, are a good marketplace for investors looking for valuable patents. Time to get sufficient due diligence is too short, argues the writer, but more importantly whether valuable patents will ever be auctioned. Auctioneering patents is an indication that the seller does not consider these patents any longer as “core business”, not having a reason anymore to keep the patents for themselves. This may indicate that the seller is out of a particular business or that the patents he auctions are “old timers”, not current technology. Niioka observes that it is improbable that large companies will not make an arbitrary choice regarding which patents to pass along to a patent auction. Nobody wants to create their own competitors either, nor do sellers want their patents to be picked up by patent trolls. There are other issues however that dr. Niioka does not mention. To name one: in a public auction one cannot make specific deals, that are possible in private deals, like a provision covering the situation that the seller is being attacked by a third party for patent infringement, where he can still invoke - his formerly owned – patents, now in the hands of the buyer, with his assistance and against a certain remuneration.

Niioka concludes that entrusting a patent portfolio to an IP merchant banker or patent broker or other IP professional is a better and safer way for a patent holder to exploit his IP.

A political brawl between Germany and France over EPLA

A seemingly innocent European Commission memo, called “Communication from the Commission to the European Council (informal meeting in Lahti – Finland, 20 October 2006), An innovation-friendly, modern Europe” turned into a row between Germany and France.

What happened? Well, have a look at the Commission’s document on page 6.
It says: “The adoption of a cost-effective Community Patent is the most important step.”

Nothing wrong, you would say. Except that in the original document the word “Community patent” did not appear. It said “The adoption of a cost-effective EPLA is the most important step.”

Some high ranking French official, based in Brussels and well connected within the EU Commission, changed on his own authority the word EPLA into “Community patent”, worse: without the knowledge of the two responsible EU Commissioners, Mc Creevy and Verheugen.

So that’s the way politics creep into the EPLA debate. Thought that only happened in Banana Republics?

Patent Review, Back to the Future?

When the United States enacted their first Patent Act in 1790, they made the issuance a matter of the highest importance. There was no patent office. The president himself (George Washington) with assistance of a committee of three (Thomas Jefferson, Henry Knox and the Attorney General Edmund Randolph) met on the last Saturday of every month to review each and every patent application. They established strict rules for obtaining a patent [1].

Although that resulted in too few patents and was soon changed to allow patents without any substantial patent review, this first system of a Patent Review Board consisting of politicians rather than technicians, was never repeated again in any patent system after 1790.

This may soon end. If the European Parliament gets its way, review of patent applications must be a job done under “democratic” supervision. On October 12, the European parliament agreed by a large majority to the European Commission’s plan of going forward with talks on patent reform in Europe, but with a number of amendments to the current plan aimed at ensuring “democratic control” of the process. The vote of the EP was on the Commission’s plan to support the EPLA (see earlier IPEG posts), so the question whether the European Community should “accede to” the European Patent Litigation Agreement (EPLA), which would mean –among other things - the setting up of a European patent court.

Do we want politicians to rule on novelty and inventive step? Hell, no! This very idea signals a worrisome trend in the way politicians look upon intellectual property. Where European innovation falls significantly behind the US and Asia and China surpasses Germany as the 5th world largest supplier of patent applications one would expect European politicians to focus on enhancing innovation rather than beset us with ludicrous ideas about “democratic” review of how patents are being granted by the EPO. European Parliament’s engrossment with so called “undesirable patents” coming out of the EPO (an allegation grossly exaggerated, see memo Severin de Wit to the Dutch Ministry of Economic Affairs of April 15, 2005) prevents a fact-based discussion on how to improve the patent system. It misguidedly focuses on issues that are irrelevant and do not at all help us making the patent system a more effective instrument to further innovation.

The idea of “democratic supervision” is both without merit, incomprehensible and legally nonsensical. Without merit because the question whether a patent has been rightfully granted by the European Patent Office is ultimately for the judiciary to decide, not the lawmakers, nor the executive. Incomprehensible, because there are much more pressing issues to be resolved by European Parliament in making the patent system more apt to the 21st century. Last but not least the whole idea is legally nonsense.

Patents are being granted by the European Patent Office, which is the executive arm of the European Patent Organization, an intergovernmental body set up under the European Patent Convention (“EPC”), whose members are the EPC’s 31 contracting states. Established by the EPC (or “Convention on the Grant of European Patents”), signed in Munich 1973, the EPO is the outcome of the European countries' collective political determination to establish a uniform patent system in Europe. The activities of the EPO are supervised by the Organization’s Administrative Council, composed of delegates from the contracting states. Oversight is being conducted by this Council. Any member of the EU Parliament can lobby its own national members of parliament to take positions and come up with new ideas in the EPO’s Administrative Council.

So what is in the European Parliament members mind when they talk about “democratic” supervision? Do they refer to the concern that EPLA judges would be mostly recruited from the EPO’s Appeal Boards? That is a legitimate concern, but what has that to do with “democratic” review? Or do MEPs mean to say that the current ideas about EPLA and the proposed system of judicial review of EPO patents should not be done by contracting states individually (so by an international agreement between European states), rather than by means of EU legislation like the Community Patent? If that’s the case, again it is a point to make, but what does that have to do with democratizing the grant of patents?

Alternatively, is it that MEPs want to have a say what type of inventions qualify as a “patent” (vide the discussion on software patents)? Lets hope this is not what MEPs really want, because if they do, we better abandon the whole patent system altogether. Why would anyone be attracted by the idea that 732 MEPs vote whether an invention is novel and inventive, so worthy of a European patent?

[1]“Hot Property” by Pat Choate, New York 2005, p.27/28

AIPPI adopts resolutions on EPLA and other important patent issues

On 11 October 2006, during the 40th World Congress of the International Association for the Protection of Intellectual Property (AIPPI) in Gothenburg, Sweden, 1,500 national representatives of 44 countries voted on a number of resolutions on pressing IP issues.

A Resolution on EPLA (the European Patent Litigation Agreement), was accepted by the AIPPI representatives. It

"urges the member states of the European Patent Organization

a) to adopt EPLA after convocation of a Diplomatic Conference as early as possible.

b) to invite the European Community represented by the European Commission to co-operate in the preparatory work for the conference with the goal it being ensured that the legal rules of EPLA be in conformity with Community law."

Furthermore the AIPPI World Congress accepted a resolution on other important IP issues, among which the harmonization of national laws on assignment and license of IP rights and the treatment of IP licenses in bankruptcy proceedings.

The Resolution “Q190”, adopted and prepared by a Working Group and discussed by representatives of all countries present at the AIPPI World Congress, calls for harmonization of laws regarding the treatment of assignment of IPRs. IPRs can only be successfully treated as collateral if more certainty is given to the assignee of those rights, in many cases banks and other financial institutions. By doing so, the AIPPI working groups, supported by the General Assembly of the AIPPI, expects that the economic importance of IPRs and its use in financial transactions, will be enhanced.

(see column at the right side "IP Docs" for translations of the Resolution Q190 in Spanish, French, and German)

Further comment on CFS Bakel vs. Stork Titan

In patent infringement litigation (and for the infringement of certain other intellectual property rights), typically, a ‘letter before action’ will be sent as a final attempt to reach a settlement before issuing proceedings. In the Netherlands, these warning letters are often sent by means of having a bailiff issue a 'writ of warning'. On 29 September 2006, the Dutch Supreme Court ruled in the case CFS Bakel vs. Stork Titan B.V, after comparing the warning letter regimes in Germany and the United Kingdom, that the patentee who invokes a pre-examined patent (i.e. the Dutch part of a European patent) which is subsequently revoked or nullified acts unlawfully if he knows, or ought to be aware, that there is a serious, not negligible chance that the patent will not be maintained in opposition or revocation proceedings (see: earlier post on this blog http://ipgeek.blogspot.com/). The rights-holder may now need to exercise more caution or risk facing an action for ‘unlawful enforcement’.

Traditionally, the Dutch take a liberal approach regarding patentees (or other right holders, for that matter) for sending a warning letter to the competition (which is considered to be the first step in the enforcement process). In 2001, the Dutch Court of Appeal confirmed the rather strict test for the unlawful issuance of warning letters: the mere fact that a patent was ultimately revoked did not necessarily mean that the enforcement of the patent was unlawful. The patentee would be at risk of a claim that the enforcement was unlawful (only) if it knew or ought reasonably to have known at the time of issuing the threat that its patent was not valid [1].
In the Supreme Court decision in CFS Bakel vs. Stork Titan B.V., the test appears to have been somewhat revised, in that the patentee's assumed knowledge has now shifted from the fact that the patent is invalid to the fact that there is a serious, not negligible chance that the patent will not be maintained in opposition or revocation proceedings.

While one could argue that in any patent case there is a serious, not negligible chance that the patent is invalid, it does not appear at all to have been the aim of the Supreme Court to hold a patentee liable per se for its action for the very reason that the patent is being revoked in the end (with the implication of an inherently serious, not negligible risk that this would happen which the patentee knew or should have known). Contrary to that, in the grounds of its decision, the Supreme Court refers back to its own decision of 1962 [2] in which it was held that to make the act of issuing a writ of warning unlawful it is not sufficient that the pretension embodied in the writ proves incorrect in retrospect (either the asserted patent being (partially) revoked and/or the patent not being infringed); it required that blame for this act can be attributed to the patentee.

Subsequently, the Supreme Court refers to the regimes in Germany and the United Kingdom as regards issuing warning letters, and concludes that in neither of those countries it is accepted that a patent proprietor who has invoked his patent, is liable to compensate the damage suffered by his competitors or others as a result of this act, on the mere ground that the patent is subsequently revoked or annulled; the regime in both countries equally requires that some sort of blame can be attributed to the patentee, according to the Supreme Court. On the basis hereof, the Supreme Court holds that the patentee who invokes a pre-examined patent which is subsequently revoked or nullified acts unlawfully if he knows, or ought to be aware, that there is a serious, not negligible chance that the patent will not be maintained in opposition or revocation proceedings.

In its decision making, the Supreme Court for the larger part has followed the opinion of the Advocate-General Huydecoper. The Advocate-General in his opinion emphasizes that given the fact that the patent survived examination before the European Patent Office – which requires quite considerable efforts from the later patentee, and particularly serves the interests of the competition – 'one can not ask much more' from a patentee to verify that its patent is valid. The Advocate-General makes an exception to the rule, however, in case the later patentee withheld relevant information from the patent office, or acquires new information after grant which sheds a new light on the validity of the patent as granted. Unfortunately, the Supreme Court did not rule on these particular aspects. It therefore remains to be seen whether the Supreme Court decision is to be interpreted in accordance also with this part of the AG's opinion (which would definitively constitute a shift in case law).

Francis van Velsen, Simmons & Simmons (Rotterdam, Netherlands)

[1 Koppert-v-Boekestein, Court of Appeal, 20 September 2001, IER 2001/57
[2] Drefvelin-v-Wientjes, Supreme Court, 6 April 1962, NJ 1965/116

Is the patentee liable for wrongfully asserting his patent?

Last Friday, September 29, the Supreme Court of The Netherlands (“Hoge Raad”) handed down its decision in CFS Bakel B.V. vs. Stork Titan B.V. (Dutch, English translation here) which considered a patentee's liability for actions taken on the basis of a patent which subsequently turned out to be invalid.

Whilst apparently endorsing the earlier approach as set out in a Supreme Court case dating from 1962 (in the case Drefelin vs. Wientjes, NJ 1965/116), where it was held that a patentee would not be liable in tort unless he acted reprehensibly, the Supreme Court gave a further gloss to the test. It would appear that the standard for tortious liability to arise is now lower than it was previously.

The Supreme Court in CFS Bakel vs. Stork held as follows:

"This means that the patentee who relies on an examined patent which is later revoked or cancelled acts tortiously if he knows, or ought to understand, that there is a serious, non-negligible chance that the patent will not survive opposition or invalidity proceedings. The mere fact that an opposition or invalidity proceedings are pending is therefore insufficient reason for tortious liability to arise."

What the Supreme Court has done is to borrow a test from summary proceedings (where an injunction will be granted unless there is a serious, non-negligible chance that the patent will not survive opposition or invalidity proceedings) and use this as the basis for tortious liability. The test would seem to be more easily satisfied than the earlier test as applied by, for example, the Court of Appeal of The Hague in the case of Koppert vs. Boekestein (IER 2001/57). There, it was held that a patentee would behave reprehensibly if he exerted his patent rights whilst knowing or having a serious reason to suspect that the patent was invalid.

The test was similarly applied recently by the District Court The Hague in the decision of 13 July 2005 in the case of Astée Flowers vs. Danziger 'Dan' Flower Farm (BIE 2006/60), a case concerning plant breeders' rights. Here, the Court held that whether or not liability was made out was likely to depend on whether or not the right was relied upon within or outside the framework of legal proceedings, and whether or not the threat was directed against a primary infringer or against his customers in the marketplace.

The same test was also applied by the District Court The Hague in Wijbenga Machines vs. Eisenkolb (April 19, 2006) and in interim proceedings (by the same court) in Novogen vs. Care for Women (January 11, 2006). There, it was held that the fact that 19 oppositions had been filed at the EPO against the patent was not in itself a reason to find the patentee tortiously liable vis-à-vis the defendant. (The patentee had threatened the defendant's customers with infringement proceedings if they continued to stock the defendant's allegedly infringing product, and had omitted to mention the fact that the oppositions had been filed). The judge did however imply that continuing to threaten the marketplace with the patent after his own finding that the patent stood a good chance of being invalidated would be likely to give rise to tortious liability in the future.

Clearly, there is a difference between a party knowing or having a serious reason to suspect that a patent is invalid on the one hand and the situation where a patentee understands (or ought to understand) that there is a serious, non-negligible chance that the patent will not survive opposition or invalidity proceedings. Estimating the chances of success in a patent action is not an exact science. In cases which end up in Court, there generally will be (at least in the eyes of the alleged infringer) a reasonable chance that the patent will indeed be defeated (or that infringement will not be made out): otherwise the case would presumably settle. How the lower Courts will come to terms with the new gloss remains to be seen.

Simon C. Dack, Barrister De Brauw Blackstone Westbroek The Hague, Netherlands

EU public consultation on a Future Single Market Policy and SME’s

In an earlier post we referred to the launching by the EU commission of a hearing on a Future Patent Policy. The report of the public hearing as well as a summary of preliminary findings can be found at the EU Internal Market website.

On September 21, the EU Commission published the report of another public consultation, on the Future of a Single Market Policy, launched in April 2006. The results, as far as patents is concerned, aren’t particularly shocking. In the executive summary it refers only once to patents, saying:

“Many argue that improving the intellectual property framework should be treated as a priority, in particular in patents and copyright. Finally, many see the opportunity for fostering innovation through public procurement rules (including for SME’s) and stress the need for increased awareness-raising for public authorities and SME’s, and better implementation and enforcement.”

It strikes us as odd, that the continuous concern expressed for the position of SME’s does not translate into a more active attitude towards patent and innovation issues by those same SME’s and their representatives. Little is known (let alone being supported by research data) how SME’s are affected by the present patent system and in what sense they have are harmed by insufficient enforcement or access to that system. It is striking that it are the SME’s that actually fail to apply for EP patents, some noting the costs of application, but again little material substantiating this claim is being presented. Again and again the position of SME’s are being mentioned as being the main victim of high costs, little access to enforcement and other perceived disadvantages over bigger industry. We have still to see what evidence is being presented to support that. It becomes time to have a more active and conclusive SME organization stopping whining about the patent system, translations and barriers to access, but rather contributing to improvements of the present system, support for a uniform enforcement system like EPLA and present a workable solution for the always present translation issue.

EPLA, the next big thing, will it fly?

October will be an important month for the EPLA ("European Patent Litigation Agreement”) initiative. However, the initiative threatens to become prey to anti-patent lobbyists (formerly known as anti-software patent lobbyists). They are now taking aim at EPLA. Last week the European Parliament debated the issue with EU commissioner McCreevy, who finally spoke in support of EPLA (see earlier post: “EPLA, The Next Anti-Patent Punchbag”). Several draft regulations have been discussed. On October 12, the European Parliament will vote on motions and draft resolutions debated last week.

The current debate, however, is being distorted by arguments that EPLA is nothing but a “coverted” way to enable the much despised software patents ‘through the back door” (One blog gave a taste of this sort of bully arguments stating “EPLA=software patent”). The loudest antis among the lobbyists do not blench at spreading outright nonsense, wrongly citing industry representatives (GSK, Nokia) to “prove” that multinational patent litigation is rare in Europe and confusing legitimate concerns with opposition (issues about cost, independent and qualified patent judges, location of the court, languages, etc). Opponents, like was the case in the software debate, use manipulative arguments and in some cases plain nonsense to get their message across. A proper and sound discussion is not helped by some opponents’ arguments. What to think of a press release by the Green/EFA group in the European parliament, heading: “EU Commission must not introduce EU patents by the backdoor”. If this is the way in which such formidable legislative work undertaken by EPC countries and IP professionals, is being debated than expect not less than a similar fate for the EPLA as for the CII (the EU Directive on “Computer Implemented Inventions”) which was defeated in European Parliament last year.

Supporters of the EPLA are also to blame. They often speak with double tongue and seem unable to launch a strong unequivocal support for EPLA. The drafters of the EPLA, most notably also the patent practitioners, organized in EPLAW, remain silent if it comes to counter arguments by opponents.

One big difference though. The EU parliament has formally no say about the EPLA, as this is a proposed legislative initiative of the same countries that initiated the coming into existence of the EPC, the European convention that created a European Patent in 1973. It is not the EU Council or EU Commission that propose EPLA, so strictly speaking EPLA is simply not subject to EU Parliament approval. Yet, politically, EPLA will not become reality if the EU Commission (Commissioner McCreevy is forced to withhold his support for the EPLA. The anti software lobby seems to accept no les than that.

The EPLA is, by all means, the “next big thing” since the major legislative task of creating the European Patent Convention of 1973 (“EPC”) . More than 30 years after this successful creation of the grant of a single European patent, Europe has been struggling to find a way to also harmonize the enforcement of patents issued by the European Patent Office. To grant a patent along uniform rules was one thing, to create a system where holders of that right can enforce it all over Europe in a predictable, cost effective and uniform way, is quite another. What seems to be forgotten in the discussions is that strong patents are beneficial to innovative activities. Innovation through protecting inventions is at the heart of post war industry policies in Europe.

Practitioners have, on behalf of their clients, tried various other ways to create a EU wide enforcement system for European patents. The cross border practice, initiated by Netherlands and Germany was recently cut off as a enforcement tool by the ECJ in its GAT vs. LuK and Primus cs vs. Roche decisions. The Community Patent (“ComPat”) although not yet formally dead, is highly unlikely to ever revive, strangled in language and costs issues. ComPat was drafted by Eurocrats, yet killed by politicians, EPLA is drafted by technocrats. Will it also be killed by politicians?

If the supporters do a similar weak job in lobbying for the EPLA at political level as they did with the CII initiative and only ridicule the opponents, without a thorough and constructive debate, EPLA is doomed to fail. The only way to go forward is to have a sound and constructive discussion between those in favor and those opposed. Industry representatives should speak with one tongue, should discuss issues with the EPLA with SME representatives among each other in industry and other lobby organizations like UNICE and similar groups. They should undertake a joint effort to make EPLA even better, not to “double tongue”. Likewise, if the opponents continue to debate the way they have aired their views so far, there will be no progress and this great initiative will not fly. It would be a disaster for Europe’s innovation policy, we will not be able to have a effective answer to growing competition of China, we will be much less effective to challenge the Asian tigers than the Americans do and we will end up in a divided Europe, with patents not being used effectively for what they are created for: foster innovation.

Agreed, the relation between innovation and patents need to be (further) researched and updated. Policymakers need to be provided with academic and independent research into the relation between innovation and patents. In Europe we can learn from the way in which in the US that same debate on quality of patents and innovation is being held.

To be continued.

CFI: innovation may render pricing rules in parallel trading acceptable

Yesterday, the European Court of First Instance (CFI) delivered its long-awaited judgement in the case GSK vs EU Commission relating to a Spanish parallel import case. GSK’s dual pricing scheme introduced in Spain did not find explicit blessing by the CFI but the European Commission’s decision was quashed in some key respects. The Commission will have to do a better job when re-analysing GSK’s 1998 “General Sales Conditions” introducing one price for drugs resold subject to price controls in Spain and a (higher) price for drugs sold abroad.

The CFI held that there is no presumption that agreements between pharmaceutical companies and wholesalers intending to limit parallel trade have as their object the restriction of competition. The CFI recognises that the market for medicines is not one of free play of supply and demand. Lower prices may not necessarily be passed on to consumers: they may benefit only those “vectors of artificial competition”. The CFI went on to hold after examining the context that parallel trade permits a limited but real reduction in the prices of medicines so that the conditions were anti-competitive in effect. Exemption may be available, however, on the basis that the conditions contributed to innovation, an issue which the Commission had not satisfactorily examined.

The CFI’s ruling can be seen as part of the “new approach” taken by Luxembourg to pharmaceutical cases which the European Commission will have to adopt. Advocate-General Jacobs in his Opinion in Syfait, in part echoing the Court of First Instance in Bayer (Adalat), widened the scope for a differentiated approach to be taken to restrictions on parallel imports in the pharmaceutical industry. Where it can be shown that the endconsumer of medicines is not deprived of concrete benefits of parallel trade in the form of cheaper pharmaceuticals, restrictions on parallel trade may be in line with EC competition law; and arguments for exemption should be examined in detail, and may succeed.

(source: Oliver Heinisch, Tony Woodgate, Rowan Freeland, Simmons & Simmons (London, UK)

Never was the word "innovation" mentioned by the CFI so many times in one decision, 29 times. The CFI specially deals with the relationship between innovation, parallel trade and competition in the pharmaceutical sector (see par. 265-297)

French Constitutional Council to Rule on London Agreement

France's Constitutional Council is due to rule on the constitutionality of the London Agreement by the end of next week. Ratification by France is the chief remaining obstacle stopping the London Agreement coming into force. The "London Agreement" is about translations of patents in Europe and is drafted as a Protocol on the European Patent Convention. It has been signed by 10 countries to date. To enter into force, at least 8 countries must ratify it including France, Germany and the United Kingdom. The current situation in Europe is that after the grant of a European patent, each country for which protection is sought requires translation of the full text of the patent into its national language.

For an average European patent [1], the patent owner thus pays an estimated € 11, 520 for translations, even though in the majority of cases the translations are never consulted. Under the London Agreement, the states would entirely or partly give up their right to a translation:

· in countries having English, German or French as an official language, no translation is required

· countries where English, German or French is not an official language would only require a translation of the claims in the national language; a translation of the description will only be required if it is not available in an EPO official language prescribed by the country concerned.

· a full translation may be required in case of litigation before the courts.

The savings to patent holders will depend on the number of countries which eventually participate, but it is expected that translation costs can be reduced by 50% if 12 countries join. The London Agreement would make therefore patent protection in Europe much cheaper. Seventy-six French parliamentarians voted to ask the Council to rule on the Agreement on September 2. The Council consists of nine appointed members and Valéry Giscard d'Estaing, who, as a former president, is entitled to sit on the constitutional body. Its job is to decide whether new legislation complies with the country's 1958 Constitution. The Council can only rule if an application is referred to it before a new law is signed by the president. Such applications are normally filed by the parliamentary opposition where it believes that civil rights are at risk.

If implemented, the London Agreement would reduce translation requirements for European patents by allowing member states to opt-out of requiring a translation into their national language.

If the Council rules that the Agreement complies with the Constitution, the country's parliament and President Chirac will be able to proceed with the ratification process. However it is doubtful whether there will be ratification ahead of the presidential election in 2007.

[1] "Average European patent" means a patent covering 8 countries for 10 years, other costs include procedural fees to be paid to the European Patent Office (Euro 4300), patent attorneys fees (Euro 5500) and national maintenance fees (Euro 8900).

Dutch Proposal for Favorable Patent Tax Treatment

Today, the Netherlands Parliament discusses a proposal of May 2006 for a new Tax Law, amending the Dutch 1969 Corporation Tax Act to introduce a so called “Patent Box”. The facility enables companies and organisations which have filed and obtained patents as a result of their R&D output in The Netherlands. With a view to encourage investments in research and development, the law proposes that costs of producing self-developed intangible assets (invention disclosures from R&D leading to a patent) do not have to be capitalised but can be immediately charged to the taxable result.

Furthermore, upon request to apply the ‘patent box’, the ‘net earnings’ derived from self-developed intangible assets may be taxed against a decreased rate of 10%. If the tax payer elects to apply the ‘patent box’, it will have to reverse the deduction of R&D expenses taken into account in previous years (taxable against the main tax rates); the capitalised R&D expenses may subsequently be amortised over the economic lifetime of the patent. While the term ‘earnings’ is not limited to formal royalty income, earnings in respect of trademarks and logos are not eligible for the patent box. The patent box can be applied to intra-group royalty income as well as third party royalty income. The amount of net earnings in which respect the patent box may be applied is capped at four times the total amount of the capitalised R&D cost. The patent box is still being further discussed with the European Commission.

Peter Flipsen , tax partner at Simmons & Simmons, published his critical views on these “Patent Box” proposals in the August issue of the Dutch tax monthly, "Maandblad Belasting Beschouwingen” (MBB). In his view the proposal contains to many restrictions (the most of which is the limitation of the 10% rate to maximum 4 times the research and development costs of patents included in the box) to make it attractive for companies to establish their R&D activities in the Netherlands or to have R&D activities performed for the benefit of Dutch entities.

(source: Loyens Loeff, “flash” publications, May 26, 2006).