The Unified Patent Court (UPC) has been a game-changer for patent litigation in Europe since its launch last June, offering plaintiffs the prospect of damages and injunctive relief spanning up to 17 EU countries. However, the UPC’s approach to certain issues has only recently started to solidify—including its application of a rule allowing the court to require plaintiffs to pay a security to cover the defendant’s costs in order to keep litigating. Earlier this year, two UPC Local Divisions reached different conclusions in weighing whether to impose securities against two separate US-based NPEs: The Munich Local Division (“Munich LD”) denied a defendant’s request for a security against one plaintiff, while the Paris Local Division (“Paris LD”) granted a request against another—the latter also rejecting a US insurance policy offered by the plaintiff as a guarantee. Now, the Court of Appeal has reviewed those two decisions, in both instances ruling against the plaintiff-appellants.

Court of Appeal Overturns Munich LD’s Denial of Security in Automotive Campaign

The decision by the Munich LD came in late April 2024, the court denying a request by defendants Volkswagen and Audi (collectively, “Volkswagen”) to order a US-based NPE, Network System Technologies LLC (NST), to provide a security for their expected litigation costs. Volkswagen cited concerns that the plaintiff’s financial position (its lack of physical assets and allegedly “limited funds”), combined with its location outside the EU, would make a subsequent cost order unrecoverable. The Munich LD held that the burden of proof falls on the party seeking to impose a security, which must make a “reasoned request” laying out relevant facts and arguments, including with respect to the plaintiff’s financial position. To that end, the court found that the defendants had provided no evidence showing a risk of outright insolvency, noting that NST’s patents could be seized if necessary. The court further determined that the NPE’s “light organization” is appropriate for its business of patent monetization. Additionally, the court ruled that NST’s location in the US could not be relevant because the UPC may not discriminate against non-EU plaintiffs, remarking that in any event, it saw no reason why it would be any more difficult to enforce a UPC judgment or cost order in the US than it would for those from any other non-US court.

The parties sparred over several of these points on appeal. Volkswagen argued in part that because NST has just two employees, has a relatively low annual turnover, and lacks physical assets altogether, there is a risk that NST would file for insolvency if costs are imposed against it, because doing so would be “easy” in light of the foregoing. Moreover, the automaker contended that the cost of litigation for NST’s parallel proceedings in US and UPC increases the risk that the patent owner will not be able to pay. NST countered that the fact that it is maintaining these lawsuits shows that it “has the financial resources to pay the legal fees and expenses for this. This comprehensive litigation shows NST is well-funded” (as summarized on appeal).

As for the Lower Division’s holding that the defendants could seize NST’s patents if necessary to satisfy a cost order, Volkswagen countered that NST had not made any showing as to the patents’ value—which, Volkswagen argued, is zero under the circumstances, because by the time the litigation ends, they will all have expired (or nearly so), and because a cost order would follow a determination that the patents are found not to be infringed or held invalid. NST pointed to the “very significant” price it paid for the portfolio as proof of their value, contending that the imposition of its security would undermine that value by curtailing its ability to enforce those patents. NST further argued that it should not have to “provide security to a massive automotive company”, particularly in light of the EU’s established policy of supporting small and medium-sized enterprises (SMEs) such as itself. While Volkswagen argued that the burden of proof as to the state of the plaintiff’s finances should fall on the plaintiff, NST argued to the contrary that “it is not for NST to show it has assets and funds”, further asserting that the Court of Appeal could only review the Lower Division’s order for abuse of discretion. The parties also disputed whether the court could properly consider NST’s location outside the EU.

The Court of Appeal issued its decision on September 17, beginning by agreeing with the Munich LD that the burden of proof should fall on the moving defendant, and that in light of the first instance court’s discretion, the Court of Appeal’s “review is consequently limited”. However, it held that reversal is warranted even under this more limited scope of review, determining that the Munich court should not have reached its decision even under the aforementioned standard and facts.

In particular, the Court of Appeal ruled that the Munich LD had “imposed a too high standard of proof”, determining that it was wrong to require “precise evidence” of insolvency in light of Volkswagen’s diligent efforts to find publicly available information on NST’s finances. Furthermore, the court concluded that Volkswagen had in fact shown that there was a real risk that NST could not pay an order of costs, as a result of which it held that NST should have had to prove that it had sufficient assets or funds—and since NST had not done so, the court presumed that none existed beyond those already discussed by Volkswagen.

Similarly, the Court of Appeal found that the Munich LD could not have considered the value of NST’s patents in determining that they were a potential source for recovery, finding that the portfolio’s purchase price had been redacted from relevant filings and, in any rate, would not show what the patents would be worth at the end of this litigation—and that certain settlement agreements produced by NST would also fail to show anything about the patents’ future value. The court further agreed with Volkswagen that the failure of NST’s case would lower the value of its patents, “in case of invalidity even to zero”.

Additionally, the Court of Appeal rejected NST’s argument that it would be denied access to justice if it had to provide a security—noting that NST itself provided that “it is a company set up by major external funding companies”, and that as a result, it is “sufficiently funded” not just for buying and asserting patents, but also for covering potential liability if its claims should fail.

Court Affirms Paris LD’s Decision Granting Security and Rejecting Offered Collateral

As mentioned above, the Paris LD reached a very different conclusion from the Munich LD in late May in litigation from another US NPE, ICPillar LLC. While the court found that the plaintiff’s US location did not independently justify a security (as the Munich LD also concluded), it further found that there was sufficient risk that ICPillar could not cover the costs of defendant ARM due to its limited source of income (derived only from patent assertion) and the lack of public records of its financial situation. The Paris LD additionally held that ICPillar’s evidence of insurance covering its potential liability was insufficient to avoid a security because this type of insurance is designed to benefit the plaintiff, not the potential rights of the defendants, and because the policy’s actual terms had not been disclosed. The court then ordered ICPillar to provide a €400K guarantee from a bank licensed in the EU—rejecting its request to allow a guarantee from a bank licensed to operate in the US (though noting that there were banks licensed in both the EU and the US that would be permissible).

This time, the appeal focused on the sufficiency of ICPillar’s US insurance policy. Among the issues in dispute was whether ICPillar could rely on this policy despite submitting it for the first time in the appeal proceedings (during which it lost a fight to keep the terms confidential). The plaintiff argued that it was not required to do in the first-instance proceeding under the applicable procedural rules, that its consideration in the appeal would not significantly disadvantage ARM because it was “highly relevant” and the defendant has been given the chance to comment on it, and because the Court of Appeal has the discretion to allow a party to rely on such evidence. ARM countered that the rules do, in fact, require the court to disregard the policy.

The parties also disputed whether ICPillar could rely on a guarantee from a US-licensed bank. For its part, ICPillar argued that to require otherwise would violate the nondiscrimination principles of the Paris Convention for the Protection of Industrial Property. Moreover, it contended that under applicable law in the Netherlands and other EU nations, a security cannot “be ordered against its own / EU nationals” (as summarized by the court), asserting that “the same should apply to US based claimants in view of this non-discrimination principle”. ARM countered that a security from a US-licensed bank is not only inadequate and more burdensome than one licensed in the EU, it also opens up a host of other legal issues—“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” (also as summarized by the court).

The Court of Appeal affirmed the Paris LD’s decision on September 16, beginning by rejecting ICPillar’s arguments as to the submission of the insurance policy before the lower court. In particular, it held that under the applicable UPC procedural rule (R.172.1), a party has a duty to provide evidence already available to it, while the lower court (under R.172.2) has the discretion, rather than the obligation, to order a party to do so. Moreover, under a UK decision relied upon by ICPillar, the High Court held that the terms of such a policy would be important. As a result, held the Court of Appeal, the plaintiff should have known that merely mentioning the policy’s existence would be “insufficient”. The Court of Appeal ruled that it does have the “discretionary power” to order the production of evidence, as R.222.2 establishes that it “may” do so.

Exercising this discretion, the Court of Appeals then “decide[d] to disregard the Insurance Policy”, finding that because it is undisputed that there is a risk ICPillar lacks the resources to pay ARM’s costs if the latter prevails, the Paris LD was right to order it to provide a security. It also found that it was undisputed that the proper amount for the security was €400K.

For more on the UPC in the wake of its first year, stay tuned for RPX’s upcoming report on the third quarter.