Context: In another decision reported today, the Unified Patent Court’s (UPC) Court of Appeal (CoA) affirmed a decision by the Paris Local Division (LD) to require a U.S. non-practicing entity (NPE) to give security for litigation expenses (September 17, 2024 ip fray article). In a case with a clearly distinguishable fact pattern, however, the Munich LD had declined to require a U.S. NPE to provide collateral, which appeared to be great news for NPEs and litigation funders (May 11, 2024 ip fray article).
What’s new: That pro-NPE decision has been reversed now as the CoA agreed with the Munich LD’s approach only to an incomplete extent (PDF). The CoA is less bullish on the value of Network System Technologies’ (NST) patent portfolio in light of the (at least impending) expiration of the relevant patents (which used to belong to Philips), and credited Volkswagen (VW) for having gone out of its way to research NST’s financial situation, while NST failed to counterbalance VW’s findings.
Direct impact: The litigation will continue regardless, and Texas Instruments already settled a few months ago (mid-August 2024 LinkedIn post by ip fray).
Wider ramifications: Compared to German national courts, the UPC still has more wiggle room with respect to the need for plaintiffs to provide security. And it doesn’t treat non-EU entities differently from EU-based ones. But the UPC, too, seeks to provide defendants with reasonable protection so they will be made whole if they prevail and seek a reimbursement of reasonable litigation costs. The NST v. VW decision contains various holdings of relevance to other cases, such as that the relative financial strength of a deliberately thinly-funded plaintiffs (as compared to that of the defendant) does not count as a (dis)proportionality or pro-SME kind of argument. Also, the UPC remains skeptical of claims that its cost orders would not be recognized in the event of enforcement against U.S.-based companies.
The positive part for defendants (apart from the fact that the CoA decided two security-related appeals for defendants today, which sends out a certain signal) includes that the UPC seeks to shield them not only from default situations in which they couldn’t recover litigation expenses (provided that they prevail, of course) but also from unduly burdensome enforcement efforts.
But it’s not as easy to get to the point where a plaintiff has to provide collateral as it may appear based on the two outcomes today. The initial burden of proof is placed on defendants. ip fray has concerns about the impact of that approach on smaller defendants unless it is clarified further on future occasions. Even though VW had the resources and ability to conduct all of the research required to call into question the future possibility of recovering litigation costs from NST, what about smaller companies?
“The burden of substantiation and proof why an order for security for costs is appropriate in a particular case is on the defendant making such a request,” one of the headnotes says. VW got over that first hurdle, so the burden shifted to NST, which then failed to show that it had the prerequisite resources. But many small and medium-sized enterprises (SMEs) wouldn’t have gotten there in the first place.
The finances of privately held companies are very difficult to research. But it is mostly those where the issue will arise. There’s not going to be serious concern over, say, Nokia’s or Ericsson’s ability to make a prevailing defendant whole.
Sooner or later, there will be a situation in which even a well-heeled defendant, short of or even despite hiring private investigators, will be unable to figure out the financial status of an opaque company. In such a situation, the UPC can still calrify that opacity also warrants burden-shifting. The decision notes that “Volkswagen sufficiently substantiated what efforts it made to search for all publicly available financial information on NST.” If the standard is that one has to make certain efforts, then it may also work for SMEs, provided that the court does not apply the same criteria to a small company as to a large one with respect to what constitutes reasonable efforts to research the plaintiff’s financial situation.
For the following reasons, the CoA understandably rejected NST’s argument (which the Munich LD had adopted) that its patent portfolio alone had significant value:
“In the copy of the purchase agreement, which was submitted as an exhibit, the purchase price was blackened. In addition, the purchase price paid will not be indicative of the value of the patents at the time the proceedings will have ended, as most patents are already expired or will do so within the next 12 months, as NST itself submitted.”
Additionally, the CoA would have liked the Munich LD to consider that a wholesale victory by VW could devalue NST’s portfolio, possibly wiping out is entire value.
NST also argued that it had settled some disputes and would receive license fees enabling it to make VW whole. Recurring licensing income by an NPE should be considered in ip fray‘s opinion, but it could be that NST elected not to be more specific about those deals as it doesn’t want VW to know those terms (with a view to settlement negotiations).
On the amount, the CoA agreed with NST. Volkswagen proposed 10% of the value in dispute (“EUR 200.000 in two cases and EUR 600.000 in the third”), and NST argued that half of it would be enough, also because VW and its almost -wholly-owned Audi subsidiary could share costs as they use the same lawyers.
This decision is not as plaintiff-friendly as many NPEs and litigation funders would have liked it to be. But it’s fairly balanced, with NST having prevailed on the amount. It’s just key that the UPC won’t expect too much investigation by smaller defendants in the future.
The decision was made (like the other appellate ruling on a security question) by the second panel: Presiding Judge (and here, judge-rapporteur) Rian Kalden, Judge Ingeborg Simonsson and Judge Patricia Rombach.
NST is represented by Dr. Thomas Gniadek of Simmons & Simmons, and VW by Bardehle Pagenberg’s Dr. Jan Boesing, Saskia Mertsching and Monika Harten.
Note that today has been an extremely busy day at the UPC, and ip fray discusssed various other decisions on LinkedIn. A roundup article will follow soon.