In-depth reporting and analytical commentary on intellectual property disputes and debates. No legal advice.
UPC’s Court of Appeal makes it easier to show that enforcement in given non-EU/EEA country is unduly burdensome
Florian Mueller
Context: Unified Patent Court (UPC) decisions on whether a defendant is entitled to collateral covering litigation expenses turn can be justified based on the plaintiff’s financial strength and/or potential enforcement difficulties. Some decisions by the Court of First Instance (CFI) reflected a limited degree of skepticism regarding the enforceability of fee-shifting orders in foreign jurisdictions, but the UPC was far from the binary approach of German courts in which the sole criterion for a security requirement is whether a plaintiff is based in the European Economic Area (EEA), which means the EU or any of three smaller countries (Norway, Iceland, Liechtenstein).
What’s new: In the JingAo v. Chint Chinese-Chinese solar cell patent dispute, the Court of Appeal’s (CoA) first panel has reversed (PDF) the Hamburg Local Division’s (LD) denial of Chint’s request for collateral, which was not based on concerns over JingAo’s financial condition but doubts that a UPC cost order would be practically enforceable in China. The CoA considered it an abuse of discretion by the lower court to hold it against the defendant that the UPC has not yet had any actual experience with enforcing security orders in China, even more so when considering the difficulties experienced by the UPC and its contracting member states in serving complaints on Chinese parties. It went on to explain that enforcement against parties based outside the EEA may be difficult while EU law guarantees recognition and enforcement across EU/EEA member states. On the procedural side, the order shows how the CoA deals with rare situations in which a response to a statement of appeal is not filed in time but a hearing involving the same parties would be held anyway.
Direct impact: JingAo will presumably provide security amounting to €200K without any problem, allowing the case to continue without disruption.
Wider ramifications: Compared to the binary German standard (EU/EEA = reliable, rest of world = unreliable), the UPC’s stance on the security requirement is still far more nuanced, not only because even EU/EEA-based companies may have to provide security if there are reasons to doubt their ability to meet certain future obligations (by contrast, German courts would require Apple, the world’s richest company, to provide security, but not financially weak EU companies). The other key differentiator is that non-EU/EEA countries are essentially given the chance to prove reliable by recognizing and enforcing UPC judgments. However, it is clear between the lines that countries will struggle to earn the UPC’s trust if service of process is or remains complicated.
In (geo)politics and in ever more patent disputes, sinophobia distracts from the real issues and from pragmatic solutions. In this UPC case, both parties were Chinese, and unlike certain UK patent rulings that have for years shown a disdain for China between the lines and through their imperialistic bottom-line effect while hypocritically denying the fact, this UPC decision is rational and non-discriminatory. The UPC was obviously fortunate to be able to address the question in a Chinese-Chinese dispute, which depoliticized the issue. The CoA didn’t just enter a reasoned default judgment against JingAo for failing to respond to the statement of appeal in time, but held a hearing before handing down this precedential decision.
Florian Mueller
For the UPC, the fact that it is new is mostly a blessing: it provides judges and counsel with the opportunity to develop a whole new body of case law. But like almost every other upside, this one has a downside, too: the UPC does not know yet what will happen in practice when any of its judgments, such as fee-shifting orders, will have to be enforced in different countries. That experience will be made over time, but patent cases tend to settle before all appeals are exhausted. And if a final non-appealable decision is on the table, enforcement of damages awards or cost orders is still rarely needed.
The two most important economies, and even more so in innovative industries, are the United States and China. That is why UPC divisions frequently have to address the question of whether companies based in those countries have to provide security. Under the simplistic German approach, the answer would be yes. It would be a total exaggeration to say that the UPC is exceedingly plaintiff-friendly, but it would also be wrong to say that placing too much of a burden on plaintiffs would jeopardize a given LD’s acceptance among those who file the vast majority of the cases. That may be part of the reason why some UPC judges have taken a “benefit of the doubt” or “show me, I’m from Missouri” kind of approach. They told security-seeking defendants that they had to make a showing why it would be difficult to enforce UPC orders, in the absence of any statistical simple due to the new judiciary’s young age, in certain countries. That’s what the Hamburg LD did in in JingAo v. Chint with respect to China.
With a statistical sample of zero incidents, it was hard to establish anything, but everyone nows that the absence of evidence is not evidence of absence. In a desire to keep the UPC reasonably attractive to plaintiffs, some LDs took into account that a prevailing defendant might end up with a practically unenforceable decision further down the road, only because it was not able to prove something that had simply not been tested at the time of the security request, placing a burden of proof on parties that they objectively could not meet.
The CoA decision redresses the balance by rejecting that “show me” approach, but in such a rational and nuanced way that no foreign plaintiff will be dissuaded from filing infringement actions in the UPC.
As a result, there is now a safe harbor for companies based in EU/EEA member states. Unlike in Germany, they may still owe security if their financial strength does not appear sufficient to make the defendant (should it prevail) whole. But there is no room for jurisdiction-specific arguments.
In this regard, the UPC is consistent with EU law and politics. In reality, the EU has some member states where the rule of law, regardless of the applicability of EU regulations, is weaker than in a number of non-member states. That is why, for example, many banks warn their customers against allowing large online transfers within the EU: if cybercriminals hack (typically through phishing attacks) an account and send money to certain EU member states, you can’t rely on sufficient help from the local authorities, be it due to corruption or other reasons for which they protect local criminals. But for patent judgments it is probably still a safe assumption that enforcement within the EU should work, especially because major EU/EEA-based patent holders tend to be in rather reliable countries.
After this new CoA decision, plaintiffs opposing a request for security and LDs reluctant to impose security requirements can no longer say that only because no enforcement of a UPC judgment has even been tried in a certain jurisdiction yet, no collateral is needed. Nor does the CoA say that any non-EU/EEA country where no experience has been built yet is inherently untrusthworthy. The standard is that, in such a scenario, “the Court must examine the likelihood of successful enforcement on the basis of other facts and circumstances.”
Even combined with the holding that EU/EEA jurisdictions are inherently trustworthy, this is not the equivalent of a rebuttable presumption that enforcement in non-EU/EEA jurisdictions is unduly burdensome. But defendants’ arguments based on enforcement or other cross-border problems are now far more likely to succeed.
In the case at hand, JingAo’s argument about service-of-process issues that the Hamburg LD rejected gained traction in the CoA. The UPC’s interactions with China have not reached the stage of enforcement of judgments and fee-shifting orders. That could take a long time. But various UPC divisions have been displeased with how service of process on Chinese defendants was delayed. Obviously, ip fray does not know what formal deficiencies may have been the reason. But for now, the UPC’s thinking appears to be that Chinese authorities complicate service of process even if, in the UPC’s opinion, the requirements under the Hague Convention are fulfilled. Again, this is a complicated question, given that the Hague Convention must be reconciled with applicable local laws and regulations. For example, if parties or courts address a document to “Hong Kong” without adding “S.A.R.” (Special Administrative Region) and juxtapose Hong Kong with China, while the latter is a sovereign country and the former is not, then this looks like an error that could be easily avoided, provided that one is aware of all applicable rules. It may just be part of the UPC’s own learning curve.
Plaintiff JingAo showed that a variety of foreign judgments have indeed been recognized in China. Those examples, however, did not persuade the CoA for the simple reason that the legal standard is not that enforcement must be downright impossible: it’s enough for it to be unduly burdensome. Disproving impossibility is not the same as disproving an undue burden.
The CoA also gave no weight to the argument that both parties are based in China. There was and is no suggestion that Chinese authorities would treat local companies differently.
In procedural terms, the order clarifies that the CoA has discretion as to whether it enters a default judgment if an appellee fails to respond in time. Such a default judgment would have to be a reasoned one, but it would obviously deprive the CoA of the benefit of oral argument. Here, there was a parallel appeal from a Munich LD order in another case involving the same parties, and a combined hearing had been scheduled. The CoA therefore decided to discuss this security question at the hearing, despite JingAo’s failure to respond in time.
