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UPC Court of Appeal: U.S. bank guarantee doesn’t count as security for litigation expenses, UK insurance policy hard to evaluate

Context: The Unified Patent Court (UPC) enjoys greater wiggle room than some national courts, such as in Germany, with respect to the provision of collateral for litigation expenses (and even more so, at the enforcement stage, though it will take more time for that part to be sorted out). Step by step, the UPC’s Court of Appeal (CoA) is now in the process of giving further guidance on the circumstances in which security must be, and the means by which it can be, provided. One such case is ICPillar v. Arm, where the Paris Local Division (LD) rejected both a U.S. bank guarantee and the argument that a UK insurance policy sufficiently protected the defendants’ interests (May 21, 2024 ip fray article).

What’s new: Yesterday evening, the CoA affirmed (PDF) the Paris LD’s decision, leaving plaintiff ICPillar, an entity that was apparently firmed for no other purpose than asserting certain patents, no other choice than to provide an EU bank guarantee of (initially) €400K. U.S. bank guarantees are clearly ineligible. The UK insurance policy that ICPillar presented was disregarded due to untimely production. The decision does not make any reference to what might have happened if it had been submitted in time, but recognizes “the difficulty [on defendants’ side] of properly evaluating the level of protection offered by the Insurance Policy which is subject to English law within a short period of time,” which does not make it impossible that even timely production could have failed to achieve its goal.

Direct impact: Given that ICPillar can afford its own litigation expenses and obtained a U.S. bank guarantee as well as a UK insurance policy (whatever its limitations may have been), it’s a safe assumption that this plaintiff will provide the prerequisite EU bank guarantee for the proceedings to continue. Presumably those who control ICPillar were pursuing an interest beyond the case at hand to stretch the envelope of security requirements imposed on small non-practicing entities asserting their patents in the UPC.

Wider ramifications: The CoA has unequivocally closed the door to any discrimination argument concerning U.S. versus EU bank guarantees. It has also made it clear beyond this particular case that a litigant who references such evidence as an insurance policy in a pleading but doesn’t immediately attach it as an exhibit faces the risk of the appeals court, even without the other party objecting, simply throwing it out sua sponte.

The CoA determined that U.S. bank guarantees are no substitute for EU bank guarantees “not solely based on nationality, but on substantive grounds.” The CoA decision does not say which substantive grounds led the judges to reach that conclusion, but para. 20 summarizes the defendants’ argument:

“A bank guarantee issued by a bank licensed in the US does not provide security equally adequate and is more burdensome than one issued by a bank licensed in the EU. A bank guarantee issued by a US licensed bank may be subject to a different legal and regulatory framework, has to be enforced in the US, possibly involving litigation and/or exequatur proceedings in the US, involving delays and higher costs and if issued in US Dollars involves exchange rate risks.”

Given such substantive differences between U.S. and EU bank guarantees, the CoA rejected the notion that this was discrimination under Art. 2.1 of the Paris Convention on the Protection of Intellectual Property Rights. Here’s the relevant article:

“Nationals of any country of the Union shall, as regards the protection of industrial property, enjoy in all the other countries of the Union the advantages that their respective laws now grant, or may hereafter grant, to nationals; all without prejudice to the rights specially provided for by this Convention. Consequently, they shall have the same protection as the latter, and the same legal remedy against any infringement of their rights, provided that the conditions and formalities imposed upon nationals are complied with.”

It is hard to see how that statute would raise any discrimination issue with respect to the criteria for a bank guarantee, given that an EU bank guarantee is also available to non-EU companies. ICPillar may have meant to make the discrimination argument with respect to the fact that it has to provide a bank guarantee at all, because it is not an EU company, but the protection of a company’s intellectual property rights is not in jeopardy if it has to provide an EU bank guarantee when litigating in the EU.

Insurance policies: more questions left unanswered than addressed

The rejection of ICPillar’s UK insurance policy is based on purely procedural grounds (untimely production), which means that (at least) the following questions have not been addressed on this occasion because the court didn’t have to reach them:

  • whether the Rules of Procedure (RoP) offer a strictly exhaustive list (“security by deposit or bank guarantee”) for Rule 158 security (i.e., security for the other party’s litigation expenses) versus a non-exhaustive one (“… or otherwise”) for Rule 352 security (i.e., security prerequisite to the enforcement of decisisions and orders that could be revoked later, thereby giving rise to wrongful-enforcement damages claims;
  • whether, if Rule 158 despite not saying “or otherwise” makes insurance policies eligible in the first place, insurance policies are, potentially, an option equivalent to a bank guarantee or deposit; and
  • what criteria have to be met by insurance policies to represent (if they can do so at all) an alternative to a bank guarantee or deposit. That would include, inter alia, the country in which the insurer is based as the concerns the CoA apparently accepted as legitimate with respect to a U.S. bank guarantee being difficult to enforce might apply to a non-EU insurer as well.

The way how the CoA arrived at the decision to disregard the UK insurance policy on procedural grounds is not as straightforward as most rejections on untimeliness grounds.

The first part is that ICPillar mentioned the insurance policy when briefing the Paris LD, but didn’t provide it. The CoA makes it clear that the Paris LD was under no obligation to make such a request. If a party seeks to leverage something, it has to put it on the table proactively.

Closely related is the holding that the subsequent addition of other defendants from the Arm group was not an excuse for not producing the insurance policy as it was at the time (and had been in place for many months). There is a typo in the CoA decision: where para. 27 refers to 28 May 2023, the date must logically be 28 May 2024.

This takes us to the final procedural question of whether this failure to produce on a timely basis could still have been cured at the appellate stage. That is a little bit different from U.S. appeals where the appeals court decides strictly on the record below. It’s not entirely impossible to have such submissions considered by the UPC CoA, but in this case, the balancing was such that

  • ICPillar’s failure to produce the document a lot sooner was inexcusable and
  • the late production of the insurance policy “disadvantaged” Arm because of the need to evaluate the policy under English law.

While ip fray agrees with the outcome, it would be understandable if ICPillar was a bit confused now. There’s a 15-day response period for appeals of this kind. Effectively, that one had to be extended because the protection of confidential information prevented Arm from working on its response when it first received ICPillar’s Statement of Appeal. But the CoA actually took that into account and decided that the 15-day period began only when the insurance policy was fully available to those who needed to see it to work on Arm’s response (July 8, 2024 ip fray article).

If it was only about the amount of time that Arm had to evaluate that policy, couldn’t an extension have solved that problem?

The CoA decision states that ultimately the insurance policy had to be provided in full, and Arm got time to amend its appellate pleading:

“Even though ARM was to a certain extent compensated for this by being allowed to amend its Statement of response after ICPillar’s request for confidentiality was rejected and the Insurance Policy became available in full, ARM was still faced with short time limits to respond to a document that requires specialist knowledge of English insurance law.”

It gets even “better”: Arm did not formally object to the production of that document on appeal. But the CoA says an objection by the other party is not needed. The appeals court itself decides what material to admit.

Given the less than straightforward path that led to this outcome, some other litigant will sooner or later present the next insurance policy (and again from a non-EU-based insurer) to test the limits. It will just produce the document proactively and early on.

Should litigation insurance policies be eligible as collateral?

To the extent that this is a question of statutory interpretation, ip fray prefers not to take a position at this stage other than acknowledging that Arm has a point by noting that the acceptable means of providing enforcement security come with an “otherwise” option while security for litigation expenses does not.

Assuming arguendo that the statute is understood to make this an option, ip fray believes that it would depend on the exact language of an insurance policy, but there are indeed litigation insurance policies that offer pretty comprehensive protection.

It is part of ip fray‘s business model to act as an intermediary in IP transactions. While such transactions are obivously confidential, ip fray is even aware of work-in-progress (WIP) insurance sometimes being available to law firms, from A-rated insurers and orders of magnitude greater than the litigation expenses at issue in ICPillar v. Arm. This is a rather new thing, but it may happen more frequently going forward. As a result of its work on IP transactions, ip fray has seen a policy document that comes with only theoretical exclusions, essentially limited to fraud or other willful acts (tantamount to self-sabotage) that would free the insurer(s) of their obligations to pay. But it’s obviously easy to put exclusions into an insurance policy that would unfairly disadvantage a beneficiary, such as by leaving room for disputes that would have to be litigated over an extended period of time and at a considerable cost. Such exclusions would lower the cost to the plaintiff obtaining the insurance, but complicate everything else.

Litigation insurance is a field of growing importance. However, that kind of instrument is fundamentally more complex than a run-of-the-mill bond, let alone a deposit, which is the simplest of all options. If the UPC decides to entertain insurance policies as potential collateral, it may get into extensive and time-consuming discussions of their terms, and such insurers are more likely than not to be based outside the EU, though some of them may have EU subsidiaries.

In its transactions business, ip fray is all in favor of litigation insurance (WIP or judgment preservation), but it is a fact that the UPC would open a can of worms by accepting such policies as security. The CoA did not close the door to those discussions this time around, and has thereby invited further attempts

Panel and counsel

The decision was made by the CoA’s second panel: Presiding Judge Rian Kalden, Judge Ingeborg Simonsson and Judge Patricia Rombach.

ICPillar is represented by August Debouzy’s Lionel Martin and Geoffrey Grandjean, and Arm by Mayer Brown’s Christoph Cruetzen, Benjamin Beck and Alexander Balan.