Context: The Unified Patent Court is rapidly developing a publicly accessible body of case law (see, e.g., yesterday’s ip fray article on a decision by the Paris Local Division (LD) on the relevance of a standstill agreement to an application to dismiss for lack of jurisdiction).
What’s new: In three materially consistent April 23 decisions that ip fray is now first to publish and report on, the UPC’s Munich LD denied applications by Volkswagen, Audi and Texas Instruments for orders to require U.S.-based plaintiff Network System Technologies to give security with a view to a hypothetical reimbursement of litigation costs. The orders explain that defendants seeking such guarantees must show that the defendant will likely not be able to reimburse such costs (i.e., a clear and present danger of bankruptcy must be established) and/or that enforcement would run into complications in a given jurisdiction. It is not enough to argue that the plaintiff is a small and foreign company. In the cases at hand, the plaintiff’s patent portfolio (acquired from Philips) constitutes a valuable asset that should give those defendants some comfort that recovery is going to be possible. The court stressed the importance of access to justice by small companies as well as the principle of non-discrimination against foreign entities.
Direct impact: The court granted leave to appeal, and all defendants have indeed appealed.
Wider ramifications: If these orders are affirmed by the UPC Court of Appeal, small companies domiciled outside the EU will find it much easier to enforce their patents, and litigation funders will benefit as well. Defendants of all kinds, notably also Big Tech, routinely insist on security for litigation expenses in German national court, even if only in hopes of delaying proceedings. Providing such collateral can be a major liquidity drain on a small company and dissuade or simply prevent it from enforcing its rights to the extent it otherwise could.
Here’s the decision, which for whatever reason has not been published by the court yet:
There are two other orders relating to other patent assertions by the same plaintiff against the same defendants, but the substance of all orders is identical.
The decisions were made by Presiding Judge Dr. Matthias Zigann, legally qualified judge and judge-rapporteur Tobias Pichlmaier and Milan-based legally qualified judge Pierluigi Perrotti. The plaintiff is represented by Simmons & Simmons’s Dr. Thomas Gniadek, whose automotive adversaries are represented by Dr. Jan Boesing (“Bösing” in German), a partner at one of Dr. Gniadek’s former firms, Bardehle Pagenberg. The two Texas Instruments entities are represented by Hoyng Rokh Monegier’s Klaus Haft.
Network System Technologies LLC, which is based in Maine (the northeasternmost U.S. state), acquired its patent portfolio from Philips. The patents-in-suit allegedly read on a network-on-a-chip design by Arteris (corporate website) that is implemented by many technology companies.
Besides the cases against VW, Audi and the two TI entities, there are also parallel actions against Qualcomm and Samsung.
In German national courts, requests for security for litigation costs have often been used to delay proceedings. In some cases that annoyed judges to the extent that they threatened to discuss a legal matter with only one party if the other declined to participate in the proceedings because they first wanted some additional security (after the amount in dispute was raised by the court) to be provided.
One particularly absurd situation occurred in 2012 when counsel for HTC attempted to delay a patent infringement action brought by Apple. Apple wasn’t as unbelievably rich as it is now, but it already had cash reserves amount to tens of billions of dollars.
German law is inflexible in this regard (as in some others). An EU-based plaintiff generally does not have to provide collateral, but a foreign one does (even if it’s literally a Big Tech). The UPC, however, gives judges more wiggle room. The Munich LD streses in those April 23 orders that an order to give security does not automatically follow from the country in which a plaintiff is domiciled, as it would amount to discrimination to treat foreign companies and jurisdictions as by definition untrusthworthy with respect to the recovery of costs.
The UPC’s Munich LD looks at the case-specific circumstances, and the burden of proof is on the moving party: there must be particular reasons for which a plaintiff should be ordered to give security. If there was a clear and present danger of bankruptcy, that would typically satisfy that requirement. But in the infringement actions at hand, all that the defendants argued came down to the combination of Network System Technologies being a small company (not a lot of staff, no huge offices etc.) and being based in the United States.
The orders note that the UPC is too young for there to be any experience so far with respect to whether its fee-shifting orders are enforceable in the U.S., but generally it is a jurisdiction that recognizes foreign court rulings of that kind.
Network System Technologies always pays its legal bills on time, and that includes not only multiple UPC cases but also some rather expensive U.S. litigation. The size of the organization appears sufficient given the company’s business model (patent monetization). The argument for Network System Technologies having a sufficient capital base for this litigation campaign that appeared most interesting to the court is that the company afforded the purchase of its patent portfolio from Philips, and that those patents constitute valuable assets that could be seized in a situation of insolvency.
The Munich LD orders point to multiple UPC decisions on the subject of a request for collateral to be provided by a plaintiff as well as to a decision by the European Court of Justice emphasizing the right to an effective remedy. The Munich LD’s logic is that the liquidity drain from unnecessary requirements to provide security is substantial and an impediment to access to justice.
With defendants now (subject to the outcome of the appeals) being expected to provide the court with facts weighing in favor of an order to give security, it is possible that defendants facing U.S.-based plaintiffs will seek discovery for use in foreign proceedings under 28 U.S.C. § 1782. But in cases like the ones at hand, it is doubtful that any facts could be obtained that would persuade the Munich LD to require the plaintiff to provide collateral.
If the UPC Court of Appeal confirms those orders by the Munich LD, non-EU licensing firms and litigation funders are going to consider it a significant benefit of the UPC, and with the same amount of funding, non-EU patentees can then afford to bring more cases.