Beyond the prohibitive cost of patent protection in Europe

Bruno van Pottelsberghe de la Potterie, Malwina Mejer, 10 April 2009

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A well-known drawback of the European patent system is the prohibitive cost of protection. Beyond its legal complexity (Straus 1997, 2002), the fragmented patent system is costly. In contrast to other large regional or national patent offices in the world, payment of national validation and renewal fees and the frequent translation requirements must be multiplied by the number of countries where the applicant wants her patent enforced. This makes European patents at least five times more expensive than those in the US (van Pottelsberghe and Mejer, 2008), despite the May 2008 ratification of the London Agreement by more than a dozen member states. Figure 1 illustrates the significant cost reductions made by the London Agreement. However, high renewal costs mean the European patent system remains more expensive than the American one.

Figure 1. The London Agreement’s cost reductions

Note: For Europe two cost scenarios are considered: (i) EPO-6 where CH,DE,FR,IT,NL,UK are targeted for protection and EPO-13 with AT,BE,CH,DE,DK,ES,FI,FR,IE,IT,NL,SE,UK. Furthermore, the costs are estimated both before and after the 15-state London Agreement (LA15). USPTO is the US Patent and Trademark Office, and JPO is the Japan Patent Office.
Source: Adapted from van Pottelsberghe and Mejer (2008).

These results suggest that European firms pay much more than their American counterparts to get a patent granted and especially to keep it in force. These higher costs make it more costly for European innovators to capture the returns to their intellectual capital. However, the lack of a uniform post-grant enforcement mechanism in Europe has much more worrying consequences than the mere prohibitive cost of acquiring and maintaining a patent in force would suggest.

Beyond the prohibitive cost: Uncertainty and complexity

Since patents are enforced on a member state level, litigating parties must rely on the local procedures of each state to enforce their rights. National jurisdictions in Europe differ significantly in their institutional design and legal practices. In Germany courts that hear infringement cases are separate from courts that rule on patent validity (a so-called dual system), while in France, the Netherlands, and the UK the same court hears and judges both kinds of cases (a single system). Moreover, the degree of institutional specialisation varies. France and the Netherlands have specialised intellectual property courts, while Germany and the UK have specialised patent courts. Furthermore, differences in legal practices concern (among other things) procedural law (i.e. understanding of what ‘damages’ are and how to assess them) and the number of proceedings relative to technically qualified judges (EPO, WPL/4/03).

In the case of parallel litigation in different jurisdictions, heterogeneous legal practices frequently lead to inconsistent interpretations of the same claims under the European Patent Convention. This creates a high degree of uncertainty as to the validity of patents. For example, in the Euro banknotes case, the ECB filed claims to invalidate the Document Security Systems patent in several European jurisdictions. Courts in France and the UK revoked it, whereas courts in Germany and the Netherlands upheld it (Mejer and van Pottelsberghe, 2009).

In addition to the legal uncertainty, the costs of enforcing patent rights in litigation proceedings vary across jurisdictions. In Mejer and van Pottelsberghe (2009), we provide evidence suggesting that relative litigation costs do influence the propensity to litigate (measured by litigation as a share of patents in force). A traditional demand curve seems to drive the relationship (Figure 2), with Germany at one extreme (with relatively low costs but many litigations) and the UK at the other (with the highest costs and the lowest litigation rate). In the US, the relatively large market actually reduces litigation costs, and hence induces a higher litigation rate.

Figure 2. A litigation demand curve, 2004

Source: Adapted from Mejer and van Pottelsberghe (2009).

In cases of parallel litigations the cost of legal proceedings must be aggregated across jurisdictions. If patent litigation proceedings are initiated in four European jurisdictions (France, Germany, the Netherlands and the UK), the parties may face a total cost of €310,000 assuming that the case is resolved at the court of first instance up to €3.6 million when accounting for the cost of appeal (EPO, WPL/11/05). These costs are particularly onerous for individuals and small and medium-sized firms, and may affect the direction of their research activities as noted by Lerner (1995).

The lack of a “single market” for inventions together with the prevalence of national jurisdictions over patent issues cause three related economic incongruities. We call them ‘incongruities’ because once defined and explained they generally incite astonishment and disbelief towards the European system.

EU-wide competition policy and national patents

The patent system is justified by dynamic efficiency (provision of monopolistic rights to stimulate innovation) and in opposition to static efficiency ensured by antitrust or competition authorities. The latter is controlled centrally in Europe by the Directorate General for Competition. There is therefore an inconsistency within the EU; its competition authority has reach over the whole European market, while the force in the opposite direction, intellectual property policy, is ultimately run at the national level in each of the 34 EPC contracting states. Europe is therefore evolving a fragmented patent regime in an otherwise centralised system, where national authorities may invalidate a patent centrally granted by the EPO, and where a national application might actually be granted independently of the EPO.

Unfair intra-EU “parallel” trade

The principle of free movement of goods in the EU makes it relatively easy to trade patented products within Europe. This of course does not preclude enforcing the patent in some countries, but it makes it more difficult to identify imitated goods and counterfeit products. Patent holders must deploy financial and managerial resources to secure their markets against potential infringers. Once the alleged infringer is identified in one of the national markets, the patent holder must rely on the legal procedures of that particular state to enforce its rights. However, if the probability of infringement were high one would logically expect the patentee to enforce its patent in the 34 European Patent Convention member states. This latter argument is rather fragile however; as it fails to take account of the real option mechanism associated with all innovation processes. Time is needed between when the invention is made and its potential market success. At the beginning of the innovation process entrepreneurs do not have the resources to afford large patenting costs in numerous (small) member states.

Time paradox

The current institutional setting within the EU allows for time inconsistencies in the enforcement of patents. A patent granted by the EPO can be challenged simultaneously in independent national and European proceedings. Within nine months from the EPO patent grant date, third parties can file an opposition against the patent (either for revocation or for amendments) before the EPO. The EPO decision on the opposition case is supposed to bind all countries where the patent is effectively enforced. However, the EPC allows third parties to challenge the validity of a patent under the legal rules of the countries in which the patent has been validated. Such a nullification action can be brought immediately upon the date of validation in a national patent office, even if there is still opposition pending at the EPO. As it takes, on average, three years for the EPO to tackle an opposition case, it is possible to be accused of infringement and pay for damages or even endure a permanent injunction at the national level even though the patent may later be declared invalid by the EPO. This happened to Senseo coffee pads’ competitors who had to pay an infringement fees in Belgium for a patent that would later be held invalid by the EPO (Mejer and van Pottelsberghe, 2009).

Harmonising European patents

Heterogeneous legal practices together with the prohibitive costs of patent enforcement and “systemic incongruities” in Europe generate a high level of uncertainty regarding the validity of a patent (and its market reach). This undoubtedly reduces the effectiveness – both real and perceived – of the European patent system in its mission to stimulate more innovation. The potential solutions, which have been on the negotiating table for nearly 40 years, include the creation of the community patent and the European Patent Litigation Agreement (EPLA). The former aims at providing an automatic protection to all member states with one patent (i.e., no more validation and renewal fees in a selected number of countries). The EPLA aims at creating a centralised court in Europe, which would be particularly useful for cross-border litigation cases. As one of us argued in a recent paper (van Pottelsberghe, 2008), the eventual creation of the community patent could improve the expected return to the research activities by expanding the effective reach of patents. Improving the expected return would stimulate further research activities, an explicit objective of the European Commission that remains unmet.

References

European Patent Organisation, Workload and cost of the European Patent judiciary, WPL/4/03, 31.10.2003
Lerner J. (1995), Patenting in the shadow of competitors, Journal of Law and Economics, Vol. 38, No. 2, pp. 463-495 .
Mejer M. and van Pottelsberghe de la Potterie B. (2009), Economic incongruities in the European patent system, Bruegel Working Paper 2009/01, and ECARES Working Paper 2009_003.
Straus J. (1997), The present state of the patent system in the European Union as compared with the situation in the United States of America and Japan, European Commission, Luxembourg
Straus J. (2000), Patent litigation in Europe - A glimmer of hope? Present status and future Perspectives, Journal of Law and Policy, Vol 2.
van Pottelsberghe B. (2008), Europe’s R&D: missing the wrong target, Bruegel Policy Brief, 2008/03.
van Pottelsberghe de la Potterie B. and Mejer M. (2008), The London Agreement and the relative cost of patenting in Europe, Bruegel Working Paper 2008/05, and ECARES Working Paper, 2008_32.

Topics: Productivity and Innovation
Tags: EU, patents

CGRI Reserach Fellow at ECARES, Université Libre de Bruxelles (BE)

Professor at the Université Libre de Bruxelles (SBS), ECARES, CEPR Fellow and Senior Fellow at Bruegel, a Brussels-based Think-Tank.

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