Wednesday, 3 April 2013

Litigation in the Brave New World 3: Early Stages of a Claim and Choice of Forum

Early stages: what's hatching?
In the third in this series of blogposts on the European patent package reform package, Don McCombie (Latham & Watkins) examines some of the detail of the provisions with which Europe's patent litigators and their clients will be expected to engage when launching a patent infringement action under the new system. As with the previous posts, the opinions expressed here belong to Don and should not be imputed to any other person or entity.

As noted in my previous post, a claimant may have jurisdiction to bring a claim before one of a number of different divisions of the Unified Patent Court (UPC). Claims for revocation and declarations of non-infringement must be commenced in the Central Division. Depending on the subject matter of the patents in suit (see Annex II to the UPC Agreement), a standalone action for revocation or a declaration of non-infringement will therefore take place in Paris, Munich or London. For infringement actions, a claimant may have a greater degree of choice. Before considering the factors influencing the choice of forum, I will first look at the early stages of bringing and defending a claim by reference to the 14th draft of the Rules of the Procedure. The Rules of Procedure will be the subject of further amendment, but the general structure of the Rules is unlikely to change significantly.

Starting a Claim – Written Procedure

According to Rule 10, proceedings before the Court of First Instance will consist of the following stages:
a) a written procedure;

b) an interim procedure;

c) an oral procedure;

d) a procedure for the award of damages; and e) procedures for cost orders.
In general, proceedings before the UPC will place far greater emphasis on front-loaded, fully-argued written submissions than actions before the English or US courts. The preamble to the procedural rules states that “proceedings shall be conducted in a way which will normally allow the final oral hearing on the issues of infringement and validity at first instance to take place within one year”, with more complex cases taking longer and simpler cases taking less time. Rule 113(1) states that oral hearings trial hearings should last only a single day, which again will be a major change for English litigators, although Rule 113(2) anticipates that oral testimony may be given at a hearing separate from the trial. During the written and interim procedures, a so-called ‘judge-rapporteur’ will have responsibility for case management, after which the presiding judge will have responsibility in consultation with the judge-rapporteur (Rule 331). The ‘general principles of case management’ and ‘case management powers’ are set out in Chapter 8.

This post will concentrate on the written procedure at the beginning of an infringement claim, including a counterclaim for revocation.

Statement of Claim

A plaintiff starts a claim by lodging a Statement of Claim in the division of their choosing (Rule 13). The Statement of Claim must comply with a long list of formalities, including an indication of the division which is to hear the claim and an explanation of why that division has competence. Where a plaintiff is not the proprietor or the only proprietor, a copy of the Statement of Claim must be served on the proprietor.

Fees for bringing actions before the UPC have two components: a fixed fee, which must be paid when lodging the relevant pleading; and a value-based fee, which must be paid within 10 working days of the order determining the value of the dispute (see Part 6 of the Rules of Procedure).

The Statement of Claim must also contain the following substantive information about the claim:
• the nature of the claim, and the order or remedy sought;

• an indication of the facts relied upon, including one or more instances of infringement or threatened infringements and the identification of the patent claims alleged to be infringed;

• the evidence relied upon, where available, and an indication of any further evidence which will be offered in support;

• the reasons why the facts relied on constitute infringements of the patent claims, including arguments of law and where appropriate an explanation of the proposed claim interpretation; and

• an indication of the estimated value of the claim.
Pleadings in the UPC will therefore be more comprehensive than those customarily used in litigation before the US courts or the English High Court. To litigators used to English practice, the prospect of having to offer a claim construction before having sight of a defendant’s prior art references and invalidity arguments may focus the mind. This will be old hat to some European litigators, however. It remains to be seen how tolerant UPC panels will be of vague initial claim constructions and later ‘clarifications’ and restatements.

Rule 14 relates to the language of the Statement of Claim, which will in general be either one of the languages of the local or regional division or, where the claim is brought in the central division or where the parties agree, the language in which the patent was granted. A defendant has one month from the date of service of the claim to object to the jurisdiction and competence of the UPC or the specific division of the UCP (Rule 19).

Defence and Statement of Revocation

A Statement of Defence must be lodged within three months of service of the Statement of Claim (Rule 23). Given the requirement to provide evidence with the defence and any counterclaim, this deadline will be tight. Although the deadline may be extended on making a reasonable request to the judge-rapporteur, but it is anticipated that the application of procedural deadlines will be strict. The Statement of Defence must also contain in indication of the facts relied upon, including any challenge to the plaintiff’s assertions of fact (Rule 24). Similarly to the Statement of Claim, the Defence must contain the evidence relied upon, and an indication of any further evidence to come. The Statement of Defence must also state the reasons why the action should fail, including any statement that the asserted patent is invalid.

Where a Statement of Defence contains an assertion of invalidity, a counterclaim for revocation must be included, which will require the payment of a separate fee (Rule 25). The Statement of Revocation must contain evidence, a statement of the facts relied upon and “one or more grounds for revocation, which shall as far as possible be supported by arguments of law, and where appropriate an explanation of the defendant’s proposed claim construction”. The defendant must also indicate whether it wishes the court to: (a) hear the infringement claim and revocation counterclaim together; (b) refer the counterclaim to the central division and suspend or proceed with the infringement claim; or (c) refer both the claim and counterclaim to the central division under Article 33(3) of the UPC Agreement. Option (b), the hearing of infringement claims separately from revocation claims, is commonly known as ‘bifurcation’.

If the plaintiff is not the proprietor of the patent(s) in suit, the court Registry will serve a copy of the counterclaim on the proprietor. Article 47(5) of the UPC states that “the validity of a patent cannot be contested in an action for infringement brought by the holder of a licence where the patent proprietor does not take part in the proceedings. The party in an action for infringement wanting to contest the validity of a patent shall have to bring actions against the patent proprietor.” It is assumed that service by Registry under Rule 25 is sufficient for these purposes. If not, Rule 305 states that the court may order a person to be added as a party.

As soon as practicable after service of the Statement of Defence, the judge-rapporteur will set a date for the oral hearing (Rule 28).

Reply and Defence to Counterclaim

The plaintiff will have two months in which to lodge a Defence to the Counterclaim, and it may lodge a Reply to the Statement of Defence at the same time (Rule 29). If there is no revocation counterclaim, the time limit for the Reply is one month. The Defence to the Counterclaim may include an application to amend the claims of the patent(s) in suit (Rule 30). Any rejoinders from the defendant, including a defence to the application to amend must then be served within one month.

The formal and substantive requirements for the Defence to Counterclaim and the Reply are similar to those for the earlier pleadings. The plaintiff has to respond to the defendant’s choice of the Article 33(3) options (see above), and it has to indicate which claims of the patent(s) are said to be independently valid. No new matters can be raised in the Reply. The closure of written pleadings, and any requests for additional written pleadings, are dealt with in Rules 35 and 36.

Application of Article 33(3) of the UPC Agreement – Bifurcation

With the possible exception of the CJEU’s role, the possibility of bifurcating infringement and validity claims has been the most controversial aspect of the UPC proposals. Bifurcated systems are seen by many as being patentee-friendly. I will try to avoid rehearsing the arguments for and against bifurcation, and instead focus on how the system might work in practice.

Rule 37 states as follows:
“1. As soon as practicable after the closure of the written procedure the panel shall decide by way of order how to proceed, with respect to the application of Article 33(3) of the Agreement.

2. Where the panel decides to proceed in accordance with Article 33(3)(a) of the agreement [i.e. to hear both infringement and validity together], the judge-rapporteur shall request the President and the Court of First Instance to allocate to the panel a technically qualified judge if not already allocated pursuant to Rules 33 and 34.

3. Where the panel decides to proceed in accordance with Article 33(3)(b) of the Agreement [i.e. to bifurcate the infringement and revocation claims], the panel may stay the infringement proceedings pending a final decision in the revocation procedure and shall stay the infringement proceedings where there is a high likelihood that the relevant claims of the patent (or patents) will be held to be invalid on any ground by the final decision in the revocation procedure.”
Article 33(3) says that local or regional division concerned “shall have discretion” as to whether to bifurcate the claim or not. There is little guidance as the criteria to be used when exercising such discretion. The decision to stay infringement proceedings pending central revocation is subject to the ‘high likelihood of revocation’ test, but no such criterion is to be applied to the decision to bifurcate in the first place. Rule 332(h) states that one of the general principles of case management is that it should be considered “whether the likely benefits of taking a particular step justify the cost of taking it”. Parties should be wary about placing too much emphasis on this single provision, however.

It is unclear whether local divisions in countries which currently bifurcate proceedings will continue to do so under the UPC. For example, I understand that the German constitution (Grundgesetz) dictates that validity and infringement issues be heard by separate national courts. Assuming the UPC is compatible with the Grundgesetz, it remains to be seen whether the multinational judicial panels of German local divisions, who will likely be highly knowledgeable about all aspects of patent law, will actively choose to refer questions of validity to a court in a different member state to be heard in another language, particularly in circumstances where a technical judge will be allocated to the local division from the central pool.

Where a regional or local division has referred a revocation counterclaim to the central division, the judge-rapporteur is obliged to accelerate proceedings before the central division (Rule 40), so as to avoid any time lag between a finding of infringement and a subsequent decision that the infringed patent was actually invalid.

Ultimately, it may be for the parties’ representatives to persuade the relevant local or regional division whether a case is or is not suitable for bifurcation, and whether the benefits of bifurcation justify the costs. The decision will be taken by a panel having the benefit of the parties’ full arguments on validity/invalidity and much of the relevant evidence in support, together with the parties’ submissions on the suitability of bifurcation to the particular case. Where there is a clear validity/infringement ‘squeeze’ on clam construction that would be prejudicial to the defendant if the issues were considered separately, this should hopefully be a factor taken into account by the panel. Similarly, where parties have already been litigating before a local division for six months, the costs to both the court and the parties of attending an additional trial hearing in Munich, Paris or London before a newly-convened three-member judicial panel, and the possible requirement for the translation of all pleadings and evidence, may run counter to some of the current benefits of bifurcated proceedings, namely cost effectiveness and the prospect of rapid dispute resolution.

In summary, it is too early to tell which courts will have a tendency to bifurcate, and the criteria on which local and regional panels will make their decisions.

Choice of forum

For many litigants, the choice of forum will be limited by the jurisdictional factors considered in last week’s post. For generic pharmaceutical companies who are accustomed to ‘clearing the way’ ahead of launch to avoid interim injunctions, assuming the relevant patents have not been opted out of the UPC, the plaintiff will have no option but to commence a revocation claim in the central division. Such claims cannot be commenced in local or regional divisions. Generics companies may be less willing to launch at risk than under current court systems, although the English Patents Court, for example, does not currently place much emphasis on validity considerations when assessing the merits of an interim injunction application. Many patentees may choose to opt out of the UPC entirely, as they will not want to take the risk of pan-European revocation of valuable rights. Companies in many industries, particularly in the pharmaceutical sector, may therefore find their litigation strategies are largely unchanged, with revocation actions continuing to be brought and defended in national patents courts. Other industries may find their litigation strategies changing dramatically, as telecoms and electronics companies may find themselves being sued more often, by claimants for whom the prospect of country-by-country litigation across Europe did not previously make economic sense. Clearly, it is not possible for defendants to ‘opt-out’ of the UPC, and a mobile phone manufacturer cannot expect to ‘clear the way’ before bringing products to market, but creative mitigation strategies may be available.

For patentees, they will be free to bring an infringement claim against a defendant in any local or regional division which has jurisdiction (see last week’s post for further details). A patentee will have to state its preferred claim construction in its Statement of Claim at the commencement of proceedings, when it will be unclear what validity challenges will be faced or whether the proceedings will later be bifurcated. This prospect may chasten potential litigants, especially where they have conducted only limited validity analysis before commencing a claim.

It seems inevitable that differences will develop between different local and regional divisions, and that some courts will acquire a reputation for being more ‘pro-patentee’ than others, attracting more cases as a result. It seems premature to try and predict where these courts might be, given that the locations of all the local and regional divisions have yet to be established. A range of factors will influence the attractiveness of a particular forum to patentees, including the following matters which already differ significantly between European jurisdictions:
• the weight placed on expert testimony relating to obviousness, and the assessment of the ‘common general knowledge’ of the skilled person;

• a panel’s receptiveness to added matter arguments (note current differences between, e.g. the EPO approach and that of the English courts);

• expansive/restrictive national accessory liability laws (see last week’s post);

• willingness to order disclosure within the scope of the procedure rules;

• whether different heads of invalidity, such as obviousness, insufficiency and added matter, will be considered together, allowing ‘squeeze’ arguments to be run, or whether a more compartmentalised approach will be adopted; and

• yes, the willingness of panels to bifurcate.
The applicable substantive laws and Rules of Procedure permit many different approaches to these matters, and time will tell how they will be treated by different local and regional divisions, possibly influenced by traditional national approaches.

It is important not to forget the benefits of the proposed system, however. The UPC will allow rights owners to take a consistent approach to substantially the entire EU trading bloc. Patentees will be able to enforce their rights in markets where the benefits of litigation do not currently justify the costs, i.e. some of the smaller European countries. Where enforcement costs have been too high, this may have affected patenting strategies in respect of the some EU states in the past, and companies may now wish to seek protection in those countries, either through European patents or Unitary Patents. Similarly, companies that regularly face parallel infringement and revocation actions in several member states simultaneously may see significant in reductions in their litigation expenditure, although the new proposals will not benefit all industries equally.
Next week: having now looked at jurisdiction and the early stages of procedure, it's time to consider the substantive laws to be applied by the UPC.

Don's first two posts can be accessed here and here

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