A UK exit from the EU
By Victoria Bentley and Helen Cline
This Insight considers the potential impact on patent law, and patent filing and commercialisation strategies of a UK exit from the EU, and sets out our thoughts on what businesses should be doing now to minimise the risks and maximise the opportunities.
The UK prime minister, David Cameron has committed to negotiating a “better deal” with the EU ahead of the UK’s EU referendum by the end of 2017. Talks amongst EU leaders on reforming the UK’s membership of the EU are underway.
Here we consider the potential impact on patent law and the patent filing and commercialisation strategies of life sciences companies of a UK exit from the EU. An exit from the EU would result in the UK no longer being a part of the new unitary patent system which will comprise the unitary patent and the Unified Patent Court (UPC) and which is likely to go ahead irrespective of the result of the UK’s EU referendum as neither initiative requires the UK’s participation.
Mark Carney, governor of the Bank of England, and other business leaders have called on the UK government to bring forward the referendum and it now looks increasingly likely that it will be in the summer or autumn of 2016. However, even if the UK were to vote to leave the EU, withdrawal would not be immediate. There would be a period of renegotiation to determine the UK’s future relationship with the EU, with many alternative models open to the UK. These include: negotiate to exit completely; retain membership of the European Economic Area (EEA) as a member of the European Free Trade Association (EFTA); return to EFTA and negotiate an arrangement similar to Switzerland’s; or, negotiate a bespoke arrangement using these agreements as a blueprint.
Whatever the outcome of these negotiations, it is clear that a UK which is no longer a member state of the EU would no longer be able to participate in the unitary patent system. However, organisations operating in the UK could still obtain unitary patents and may have to deal with the new UPC.
Current EU patent law
With a few exceptions, patent law remains largely unharmonised across the EU. It is defined by national law and international treaties such as the European Patent Convention (EPC). There is no facility at the moment for EU-wide patent protection through a single registration; the current traditional European patent is a ‘bundle’ of national patents, and only effective in those EU member states in which it is validated. Disputes over European patents are currently adjudicated in the same manner as disputes over national patents by the national court of each applicable member state with the impact only pertaining to the state in question.
The new unitary patent system
Europe has undergone an overhaul of its patent system. The new unitary patent system will include a new intellectual property right in the form of the unitary patent together with a new intergovernmental court, the UPC, to deal with the majority of disputes relating to unitary patents and European patents. Unitary patents will be granted by the European Patent Office (EPO), an intergovernmental organisation separate from the EU set up under the EPC. It currently grants patents for 38 countries (including all 28 EU member states). The unitary patent will make it possible for businesses to obtain patent protection for their inventions in EU member states through a single patent registration at the EPO without the need for validation. The unitary patent will co-exist with, and be an alternative to, national patents and European patents. The UPC will deal with enforcement and revocation of both unitary patents and European patents. The current centralised administrative opposition procedure for European patents and, in the future, unitary patents will remain the same. The reform offers benefits compared to the current system but also has risks.
Before the unitary patent system can be finalised and the unitary patent protection can become a reality, at least 13 member states, currently to include the UK, France and Germany, must ratify the UPC Agreement. The UPC Agreement will enter into force on the first day of the fourth month after the deposit of the thirteenth instrument of ratification or accession and, from that date, European patents (which have not been opted out) and unitary patents are subject to the jurisdiction of the UPC.
Participation in the new unitary patent system is open to all EU member states. Of the 28 potential participants, the unitary patent will only apply in those member states that participate in the Unitary Patent Regulations and sign and ratify the UPC Agreement (currently 25 of the 28 EU member states).
At the time of writing, nine member states, including France but not the UK or Germany, have ratified the UPC Agreement.
It was expected that the UK ratification would take place well ahead of the referendum, possibly in early 2016. However, as it is increasingly likely that the referendum will now take place in the summer or possibly the autumn of 2016, postponement of the UK’s ratification is possible, although this has not been confirmed by the UK Intellectual Property Office (UKIPO). As long as the UK is a member of the EU, its ratification is likely to remain mandatory in order for the unitary patent system to proceed.
Impact of UK leaving the EU on the unitary patent system
The introduction of the unitary patent system is likely to be unaffected by the outcome of the referendum other than, perhaps, the potential delay to ratification if the UK drags its heels in the run up to a referendum and possibly a perceived lack of appetite from patentees due to the loss of the UK from its coverage.
However, participation in the new unitary patent system is only open to EU member states. Indeed, at an early stage of the negotiations, and following a decision of the Court of Justice of the European Union (CJEU), the UPC Agreement was amended to exclude the participation of non-EU member states.
The UPC Agreement is drafted to allow for changes to membership of the EU and requires ratification by the three member states (helpfully defined as the members of the EU) in which the highest number of European patents had effect in 2012. So if the UK leaves the EU before ratification takes place, it looks like the Netherlands (although there is some debate that it should be Italy) becomes the third country, together with Germany and France, whose ratification of the UPC Agreement is mandatory.
It is not clear what will happen to any unitary patents that have already been granted. One solution would be to allow for the conversion of the UK designation to a European patent with the patentee being required to validate in the UK within a certain period. We expect that a solution will be found as part of the broader withdrawal arrangements, so that existing unitary patents remain in force in all the remaining participating member states.
It is unclear what law of property would apply to a unitary patent granted to an applicant with its principal place of business in the UK after the UK ceased to be a member state of the EU. The governing law of a unitary patent as an object of property is not affected by later transfers of ownership but is fixed at the date of the application. Companies should factor in issues of applicable law when making applications to the EPO now, even before the system is up and running; so that any application they may wish to register as a unitary patent post grant will have the most advantageous applicant combinations.
The future of a London-based seat of the central division of the UPC handling life sciences would be uncertain. Whilst only EU member states can participate in the UPC, the UPC Agreement appears to fix the life sciences seat of the central division in London; it does not seem to be dependent on the UK being part of the unitary patent system (or indeed a member state of the EU). However, although the UK is currently the leading venue for life sciences litigation in the EU with a wealth of relevant expertise, it is likely that the court would be moved to another member state (probably the Netherlands).
It is also uncertain if the UK will ratify the UPC Agreement before the UK referendum and of course what the outcome of the referendum will be. Our prediction is that the UK will remain in a ‘reformed’ EU, but predictions can be wrong!
Patent options in Europe post UK exit from EU
The UK is unlikely to change its involvement in the EPC and would remain a contracting party. Therefore, in terms of patent registration and enforcement in the UK as currently practised, an exit from the EU would have very little impact, even if membership of the EEA was not retained (with the exception of control of parallel imports discussed below). If the UK is no longer an EU member state, unitary patents will not have effect in the UK and the UK cannot be party to the UPC Agreement. As is the case now, patent protection for inventions in the UK will be obtained by either validating European patents upon grant to have effect in the UK, or by filing nationally through the UKIPO or under the auspices of the Patent Cooperation Treaty (PCT).
Whatever the outcome of the UK referendum, when the unitary patent system comes into force, life sciences organisations operating in Europe will be able to choose to obtain a unitary patent covering at least 13 member states but not the UK. However, unitary patents are not mandatory and are not expected to replace European patents. Where an organisation requires broader protection than a unitary patent in Europe it will have a number of options, including applying to the EPO and post grant registering as a unitary patent and validating the European patent in the other relevant EPC jurisdictions. Alternatively organisations may question the value of a unitary patent when it is possible that one of the key territories, the UK, could be excluded, and elect instead to validate the European patent in all relevant member states of the EPC. Patentees wishing to ensure that their key patents do not fall under the jurisdiction of the UPC, at least until they have confidence in the system, may choose to file nationally, possibly using the existing global patent prosecution highway to speed up the process and reduce the cost.
Impact of complete UK exit on other aspects of EU patent law
Patent owners may have a real opportunity to stem the flow of patented products into and out of the UK. Parallel trade is a constant threat for life sciences companies, particularly biopharma companies in the EU. The principle of exhaustion is not enshrined in UK patent legislation and is instead solely founded on CJEU case law. English courts, devoid of a legislative basis for applying the doctrine, would likely apply the law as it is currently applied to goods from outside the EU.
Given that the provisions of the Biotechnology Directive have been implemented into UK law, these provisions would remain in force unless specifically revoked. The principal amendments to UK law could simply be removal of the references to the Biotechnology Directive.
The EU Bolar exemption is incorporated into UK law and so would remain in force unless revoked. However, any subsequent amendments to the EU legislation following the recently proposed review of the scope of the exemption in Europe and the introduction of a manufacturing SPC Bolar for exports would not apply to the UK. However, the UK government would likely monitor changes to EU legislation and legislate to ensure that the UK life sciences sector companies are not disadvantaged relative to their EU competitors.
The SPC Regulation should cease to apply. A UK SPC system, possibly based on the EU SPC legislation, would most likely be put in place. For existing SPCs granted under EU law to continue to have effect, they would need to be recognised in the UK – possibly by being re-registered as UK SPCs. In addition, although the UK courts would no longer be bound by the CJEU, decisions on the interpretation of the SPC Regulation may remain persuasive (to the extent applicable) so as to provide some degree of certainty! The European commission has recently announced that it is planning to explore a new unitary SPC right. It is possible, as with the unitary patent, that this will be restricted to member states and would be unlikely to extend to the UK. Again the UK government would likely amend UK legislation to ensure the UK remained attractive to life sciences businesses.
What to do now
Review patent filing and commercialisation strategies
Companies should aim to take advantage of the best aspects of the current and future alternative routes to EU patent protection and commercialisation. In this period of uncertainty around the UK’s participation in the unitary patent system a mixed portfolio may be the least risky option. However, the best choices will depend very much on business strategy and how an organisation plans to utilise its patent portfolio.
Irrespective of the referendum or its outcome, a review of current patent filing and commercialisation strategies would be prudent so that companies can begin contingency planning, regardless of whether they believe the UK will vote to leave the EU or not. There is a commercial risk that pending patents will fall under the new regime if granted after the UPC Agreement comes into force. Although the risk-benefit analysis of whether to opt out may change in light of a UK exit from the EU, life sciences organisations may elect to opt out their key patents during the sunrise period. The start date of the sunrise period has yet to be announced but expectations are that it will be in mid 2016.
Audit existing contractual and securitisation arrangements to identify potential contractual exposure
A UK exit from the EU may also impact on licensing and other commercialisation strategies. For example, if a patent licence is tied to the moving definition of the EU territory, a UK exit could lead to the licence no longer covering the UK. We suggest incorporating an obligation in those circumstances to execute the necessary additional licences to avoid infringement. Also, certain provisions that are currently prohibited under the various EU block exemptions while the UK is within the EU may be allowable in certain circumstances if the UK were to leave the EU completely. Companies should consider how agreements may be revised to accommodate this or whether there is value in retaining the existing effect of these contractual provisions. Inserting a generally worded hardship clause allowing either party to renegotiate terms if the agreement becomes unprofitable may also be useful if an exit from the EU could have a substantial impact on the commercial deal. It may also be prudent to review any securitisation arrangements to determine what actions may be necessary to ensure that the consequences of the UK leaving the EU do nothing to devalue the patent portfolio.
It is worth bearing in mind that, even if the UK pulls out of the EU completely, decisions made in the EU will continue to have a profound effect on the UK and life sciences businesses operating out of the UK; the UK, however, could lose its voice in the debate. Therefore, engagement with and participation in the on-going national and wider European debate about modernising, reforming and improving the EU is essential. If the UK votes to leave the EU, it will be important to have a say in how it should leave.
*A version of this article was first published in Life Sciences IP Review Magazine on 3 December 2015.
6 Jan 2019