Arbitration and Patent Disputes — Will the Unified Patent Court Agreement Change the Status Quo?
20 March 2023
Author: Vilhelm Schröder
Traditionally, arbitration has been considered to offer several advantages compared to state litigation. There are certain advantages that could (at least arguably) be relevant for patent disputes as well. Such advantages could, for instance, relate to the speed and confidentiality of proceedings. Other potential advantages, such as expertise of the judges, may be less relevant, especially when a patent dispute is heard before a specialised IP or patent court. However, speed can certainly be a very important advantage, as prolonged proceedings are time-consuming and costly for the parties. The centralised nature of arbitration could also be considered beneficial, compared to multinational and parallel court litigation with separate appeal routes. Of course, with the UPC, there will no longer be a need for litigation in several countries separately, which means that this advantage for arbitration will be of less relevance.
Arbitration can be a good mechanism for resolving patent disputes related to licensing agreements. The disputes could, for example, relate to the amount of the licence fees payable by the licensee. Recently, parties have been choosing arbitration in the telecommunication industry to resolve disputes related to standard essential patents (“SEPs”) to determine whether the royalty rate under the licence agreement is fair, reasonable, and non-discriminatory (“FRAND”).
However, there is a significant uncertainty when it comes to arbitration: validity. What happens if the counterparty claims that the patent is invalid and that the plaintiff’s action is thus groundless? The problem is that it is not always clear whether the question on validity is arbitrable at all, and, even if it was, in relation to whom such an award would be binding. This uncertainty arises from the fact that a patent is a right that has been registered nationally by a public authority, and it has been argued that only a public authority could therefore invalidate a patent. This is a significant downside when it comes to arbitration, since invalidity is a very common counterclaim against patent infringements. Likely due to a lack of contract relationships in certain industries (e.g. pharmaceuticals, especially between competitors) as well as the uncertainty related to the arbitrability of invalidity claims, patent disputes in some industries are usually resolved by state courts instead of arbitral tribunals.
However, an interesting question is whether the Agreement on a Unified Patent Court (“UPCA”) will change the state of play somehow when it comes to arbitration as a dispute resolution mechanism for patent disputes. On 17 February, it was announced that the UPCA will enter into force on 1 June 2023. The UPCA includes provisions on patent mediation and arbitration. I will only discuss the latter in this article. Pursuant to Article 35 of the UPCA, a patent mediation and arbitration centre will be established with seats in Ljubljana and Lisbon. Pursuant to the UPCA, the arbitration centre will provide facilities for mediation and arbitration of patent disputes falling within the scope of the UPCA. However, it is not entirely certain that the patent mediation and arbitration centre will be able to begin its activities on 1 June 2023.
The Achilles Heel — (In)validity of a Patent
Different National Approaches
A dispute merely related to a licence agreement can usually be settled by arbitration. However, as stated above, there are certain limitations when it comes to the arbitrability of claims related to the validity of a patent if raised in connection with the arbitration. Problems may emerge when trying to enforce the award, if not earlier.
The question of whether a dispute regarding the validity of a patent can be settled by arbitration can be tricky. In principle, a dispute regarding a question that requires the involvement of a public authority cannot be subject to arbitration in Finland. Namely, pursuant to the Finnish Arbitration Act, disputes in a civil or commercial matters that can be settled by agreement between the parties may be referred for final decision to be made by one or more arbitrators. The question regarding the validity of a patent ba be considered to fall outside of the private discretion of the parties, as it involves the exercise of public authority, and cannot be settled by agreement between the parties. The validity of a patent is ultimately resolved by state courts, and the outcome will be available in public registers and thus also be visible to third parties.
Nevertheless, in Finland, it may be possible for the parties to agree on a question subject to public authority, but the effect will be limited only to the parties themselves (inter partes). It cannot be ruled out that the parties could choose to resolve disputes related to the validity of a patent in arbitration. It is important to note, however, that in Finland, arbitrators do not have the power to invalidate a patent erga omnes. However, if an arbitral tribunal would not revoke a patent but rather order the patent holder to surrender his patent or not invoke it against the counterparty, the situation may well be different. Unfortunately, a clear line cannot be drawn here. An arbitral tribunal dealing with questions related to patent validity should, to the extent it considers itself competent, carefully consider the grounds relied upon as well as the wording of the operative part of the award.
When it comes to resolving patent disputes, there are different approaches in different jurisdictions. For example, in Germany, arbitral tribunals are not typically allowed to rule on the validity of patents because such matters fall under the exclusive jurisdiction of the Federal Patent Court. However, in Belgium, the approach is different. All disputes related to intellectual property rights, including those concerning the validity of patents, can be subject to arbitration. Moreover, in France and Portugal, the approach is similar to Finland, where revocation may be possible, but only with an inter partes effect.
Mediation and Arbitration Centre of the Unified Patent Court
The UPCA includes provisions on patent mediation and arbitration. Pursuant to Article 35 of the UPCA, a patent mediation and arbitration centre is established (with seats in Ljubljana and Lisbon). Pursuant to the UPCA, the patent mediation and arbitration centre will provide facilities for mediation and arbitration of patent disputes falling within the scope of the UPCA.
Article 82 of the UPCA will apply to any settlement reached using the facilities of the patent mediation and arbitration centre. Pursuant to Article 82 of the UPCA, decisions and orders of the UPC are enforceable in any contracting Member State. An order for the enforcement of a decision must be appended to the decision by the Court. Thus, the arbitration award will, like the decisions of the UPC, be enforceable in all Contracting Member States.
The scope of the UPCA covers European Patents, European Patents with unitary effect, and supplementary protection certificates (SPCs). Thus, disputes regarding the aforementioned patents and SPCs can be settled in the arbitration centre.
However, importantly, under Article 35(2) of the UPCA, a patent may not be revoked or limited in mediation or arbitration proceedings. It seems that if the wording of this provision is strictly followed, the arbitral tribunal under the UPCA does not have competence to rule on revocation claims at all, not inter partes nor erga omnes. This would significantly narrow down the disputes that can be resolved by the patent mediation and arbitration centre, but it will of course be for the patent mediation and arbitration centre of the UPCA to decide how to interpret this provision, once the UPCA has entered into force. What is quite clear is that the centre does not have competence to revoke a patent erga omnes.
Nevertheless, based on the wording of Article 35(2) of the UPCA, it cannot be ruled out that disputes regarding the validity of a patent could be settled by the patent mediation and arbitration centre with inter partes effect. It may be that the operative part of the award would have to be quite carefully considered by the tribunal in such cases. Pursuant to Rule 11(2) of the Rules of Procedure of the Unified Patent Court (“RoP”), the Court (i.e. the UPC) must, if requested by the parties, by decision confirm the terms of any settlement or arbitral award by consent (irrespective of whether it was reached using the facilities of the Centre or otherwise), including a term that obliges the patent owner to limit, surrender, or agree to the revocation of a patent or not to assert it against the other party and/or third parties. Therefore, it appears, that if the institutional rules applicable to the arbitration allows for this, the arbitral tribunal could, for example, in an arbitral award order one of the parties to surrender their patent or not to invoke it against the other party — and the UPC could confirm such an award. Rule 11(2) of the RoP offers a very interesting mechanism, but it remains to be seen to what extent it will actually be used in practice.
Drumroll… Nothing Changes?
To sum up, it does seem that the patent mediation and arbitration centre of the UPC will not significantly change the status quo when it comes to arbitration and patent disputes. Validity (at least erga omnes) is still not arbitrable as a main rule, and unless the centre finds new and creative solutions (for example those referred to in Rule 11(2) of the RoP or other solutions) that would be more widely used in arbitration, full-blown patent disputes are likely to not be arbitrated in the centre. However, in licence disputes, questions that are more limited and do not relate to validity (e.g. amount of royalty) may well be subject to arbitration if the parties so decide.