Death at a Funeral – or Birth? Why the German Court’s Decision on the UPC May Not be the End

On Friday, March 20, the German Constitutional Court (“Bundesverfassungsgericht”, “BverfG”) declared Germany’s approval legislation of the Agreement on a Unified Patent Court (UPC) unconstitutional.

Those who have gone into full mourning over this decision, calling it the death knell of the UPC, may find the coffin to be far from shut. Instead, the UPC may have been given a second lease on life, and those with substantive concerns about the UPC may end up wearing the black ribbon in the long run.

What the German Court Decided

The constitutional challenge took issue with the way the UPC approval legislation was passed (i.e. the lack of a 2/3 majority) and further raised substantive concerns regarding the UPC (e.g. selection of judges, UPC administration, violations of EU law).

The court found in favor of the challenger only with respect to parliament’s failure to pass the approval legislation with a 2/3 majority. In this regard, the court found that the challenger, an individual intellectual property lawyer, had standing and that the UPC approval legislation required a 2/3 majority in parliament (Art. 38 para 1 sentence 1, Art. 20 paras 1 and 2, Art. 29 para 3 of the German constitution, “Grundgesetz”, “GG”).

In all other respects, the constitutional complaint was dismissed for lack of standing. The court went further and, in dicta, provided some insights into its views on the other issues raised in the complaint.

First, concerning the selection of judges, the court states “[t]he appointment of judges by the administrative body requires unanimity, resulting in an equal and decisive role of the German representative. In the light of this as well as the fact that German participation in supranational courts has never been called into question by the court, a closer examination of the requirements for the democratic legitimization of judicial acts in the supranational context and the court’s precedent would have been required” (para 106 of Friday’s decision).

Second, as far as the abilities of the UPC administrative body are concerned, the court dismissed arguments that try to draw parallels between the UPC agreement and free trade agreements such as the CETA free trade agreement between the EU and Canada. The court pointed out that under the UPC agreement member states are represented in the UPC administrative body which makes decisions with a ¾ majority. The court further emphasizes Germany’s ability to veto revisions to the UPC agreement and parliaments role regarding Germany’s activities in the UPC administrative body.

Third, the court made clear that even if the UPC agreement itself violated EU law, such a violation would not nullify the national approval legislation. The court was particularly adamant about the plaintiff’s lack of standing on this count. However, the court explicitly left open the question whether things might be different in light of rights under the EU Charta of Human Rights where a matter is governed entirely by EU law “[b]ecause the UPC approval legislation is meant to establish the UPC as a standalone supranational institution outside the EU. Specific EU rules for this do not exist.” (para 116 of Friday’s decision)

Quo Vadis, UPC?

The UPC approval legislation passed the German parliament unanimously on March 19, 2017. In the 2019 election, chancellor Merkel’s CDU won 246 seats, the partner in her “grand” coalition, SPD, won 152 seats. The green party won 67 seats, the liberal democrats (FDP) 80, the communist party (“Die Linke”) 69, and the Alternative for Germany (AFD), who was not in parliament when the approval legislation was initially passed, won 89 seats.

Even if the AFD, which is said to be critical of the UPC, and the communist party, which voted against subsequent UPC related legislation, were to vote against the approval act, the government should have no difficulty in securing a 2/3 majority. If the outcry over the constitutional court’s judgment is any indication, a re-vote of the UPC approval legislation should also be carried by public support.

Friday’s ruling is no guarantee against constitutional challenges to future UPC related legislation. However, the court provided guidance, if in dicta, concerning its views regarding both standing and the merits of such a challenge, which may deter future attacks.

What About Substantive Concerns Regarding the UPC?

For years, the alleged benefits of the UPC have seemingly been taken for granted and questions about them were dismissed outright. Perhaps the BVerfG’s ruling provides a moment for further reflection in this regard.

Two of the key benefits frequently asserted are cost and reducing duplicative litigation. Yet, the European Commission’s own studies show an overall duplication rate of only approximately 8%. A closer look reveals that the duplication rates in Germany and France are much lower at 2% and 6% respectively. In the Netherlands the duplication rate is 15% and in the UK it is 26%. With the UK no longer part of the UPC, the combined duplication rate should be even lower than the 8% called “small” in the EU Commission’s 2013, ZEW study.

The cost benefit is cast in doubt as well. The UK House of Commons report “The Unified Patent Court: help or hindrance?” details respective questions at p. 26 et seq. Sir Henry Carr, QC summed it up in his testimony to parliament: “This complex structure is likely to be far more costly and burdensome for SMEs than the existing system in the UK.”

Sir Henry’s assessment gains importance when considering it in light of the EU Commission’s own expert evidence. Prof. Dietmar Harhoff’s report “Economic Cost-Benefit Analysis of a Unified and Integrated European Patent Litigation System” states on p. 31 that the cost of patent litigation in the UK, at least at one time, was more than five times the cost of patent litigation in Germany. The courts in Düsseldorf alone are said to hear more than 60% of European patent litigation.

A finite comparison of reimbursable cost under the UPC versus the statutory reimbursement regime in Germany was conducted by Ingve Stjerna, the author of the constitutional complaint that led to today’s BVerfG ruling. Although the statutory reimbursement regime may not be widely used by German patent litigators, Stjerna’s analysis shows that for first instance litigation, reimbursable cost under the UPC exceed reimbursable cost under the German regime by a factor of 3.64 on average. Combining first instance litigation and an appeal, that factor is 3.44. Even when considering a third instance proceeding in Germany where no such proceeding exists under the UPC, the UPC reimbursements would exceed those allowed for under the existing German statute by a factor of 2. (“The European Patent Reform – The prearranged affair”)

And Brexit?

No matter how one looks at it, the United Kingdom will almost certainly not be part of the UPC. The UK’s negotiation objectives for its future relationship with the EU published on February 27 seem to make that clear. To that extent, the decision of the German constitutional court may be of little relevance.

Nevertheless, paragraph 2 of the decision states that in the view of Germany’s Constitutional Court, only member states of the European Union may be part of the UPC. That is in line with the CJEU’s opinion of March 8, 2011 (1/09, EU:C:2011:123) and leaves Richard Gordon QC and Tom Pascoe ploughing a lonely furrow with their opinion “Re the Effect of ‘Brexit’ on the Unitary Patent Regulation and the Unified Patent Court Agreement” in which they suggest the contrary.

Whether the UPC makes sense without the UK is beyond the scope of this article. At least pre-Brexit, the UK was one of the major patent litigation jurisdictions in Europe in terms of case load. The cost of litigation in the UK tends to be higher than in many continental jurisdictions such as Germany.

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