EPLA - the European Patent Litigation Agreement - promises to install a single court to judge European patent cases. There are many questions. Why is Germany pushing so hard for this new system? Would EPLA push the European patent system off the cliff, like a similar central court did in the US? Is litigation really an issue today?
What's been lacking in the debate up to now are hard figures. We have studied several sources for litigation data including a report published in 2004 to put together a new data set and analysis.
The FFII has consistently argued that those pushing for EPLA are the patent industry and certain large software firms, including SAP, Siemens, and Microsoft, who's patent lawyers have systematically argued that litigation is too costly, that large firms find the European market uncertain, and so on.
Microsoft, which is currently using the threat of unspecified patent infringements to bully the IT sector into buying Microsoft “licenses” for Linux, obviously wants an EU patent system that lets it easily enforce its software patents. SAP and Siemens, dinosaurs of the last century, see software patents as a way to keep small competitors at bay. These firms see EPLA as a tool for forcing their patents on the whole EU at once.
But why does the patent industry - the lawyers and specialists who profit from patent litigation - want EPLA?
Figure 1: the average number of patent cases that go to first instance annually, across different European countries. Data taken from Commission study and updated from interviews with national representatives.
Figure 1 shows the average number of patent cases that go to first instance annually, across different European countries. Germany accounts for 57% of the roughly 1,200 patent lawsuits in Europe each year and the next closest country is the UK, with only 10%. Clearly something is going on in Germany… it is the EU economy that has grown the slowest over the last twenty years, yet has five times more patent lawsuits than the UK, one of the most dynamic major economies.
We can make three possible conclusions. One: litigation is irrelevant to economic growth, in which case the arguments from pro-EPLA firms that easier litigation is important for economic growth are wrong. Two: litigation is a consequence of poor economic growth, in which case the arguments from pro-EPLA firms are irrelevant. Three: litigation is a cause of poor growth, in which case the arguments of the pro-EPLA firms are positively dangerous. Take your choice: when large firms call for EPLA, they are either wrong, irrelevant, or harmful.
Figure 2: the average cost to each party for a first round of litigation or cancellation proceedings. Data taken from Commission study.
Now to figure 2. This shows the average cost to each party for a first round of litigation. It goes from 5,000 Euro in Hungary to 600,000 Euro in the UK. Germany is about average, at around 150,000 Euro. But across the border in Austria, which has only ten cases a year, the cost is fourteen times lower.
There is a clear correlation between number of patent cases, market access, and cost. Do higher costs encourage more people to go to court rather than settle out of court? That seems unlikely. The cost of court cases depends rather on the cost of lawyers and experts, and these, like any businessmen, charge as much as the market will bear. Patent litigation, it seems, follows a negative economy of scale. The more patent cases, and the more restricted the competition in the market, the more lucrative the market.
We can make a clear prediction: a central EU patent court, which hears 1,200 cases a year, will also follow the negative economy of scale. The Commission's predictions that this will cost less are wrong. With a single court and no competition, lawyers and experts will charge more, and the cost of litigation will rise to well above that of the UK.
Figure 3: number of patent cases multiplied by cost per case for both parties combined.
Lastly, to figure 3, which shows the relative sizes of the patent industry per country. Together, the German and British patent industry takes a staggering 90% of the whole EU market. What can we conclude from this? Perhaps simply that it is unwise to listen to the voices of the German and UK patent establishment, when we start to discuss patent reform.
From our study, it's fairly clear what will happen if a single European patent court is put into place, as the patent industry wants.
- First, costs will rise dramatically. We know this because already today there is a clear correlation between patent litigation volume and litigation costs.
- Second, patent quality will fall, as it has in the USA, because an already powerful patent industry will control the single court and will fix the rules to reduce the barriers of obviousness, prior art, industrial application, and - above all - subject matter.
- Third, patent litigation volumes will rise, as more and more weak, overlapping, and unclear patents are granted by an EPO that is already geared towards granting, not rejecting patents. To predict a growth of 10-20% per year is not unreasonable.
- Last, the cost per litigation will increase until it matches or exceeds the cost in the USA, which was about 1.5M Euro in 2003, being ten times more than today's average (which is already heavily biased by UK costs).
Conclusion: with a single European patent court, the overall value of the patent litigation industry in Europe could well rise by five to ten times, to 2Bn-5bn Euro/year.