Europe's high-tech firms are threatened by patent reforms that will expose them to one of the worst features of the US system, says a patent expert

(Image: Andrzej Krauze)

EFFECTIVE patent laws are critical to high-tech economies. Patents are a contract between an inventor and society: the inventor makes an idea public, and in return the state allows the inventor exclusive rights for 20 or more years.

All countries with an advanced technological economy have strong patent systems, and in countries where patent law is weak, innovation suffers. So why is the European Commission pushing an initiative that threatens to weaken Europe’s patent system, by outsourcing legal decisions to questionable judiciaries and obliging firms to conduct business in a tax haven?

The reforms are supposed to solve a major problem with Europe’s patent system. When an inventor applies for a patent, a single application works for all of “Greater Europe” – a group of 38 countries including all 28 member states of the European Union.


This system was introduced in the 1970s to replace a patchwork of national patent offices. Inventors had to apply for a separate patent in each country, paying separate fees and dealing with different processes. The success of the European patent is reflected in the large number of countries that participate.

There is, however, a gotcha. Although there is a one-stop shop for applications, enforcement is still done separately in each country. Inventors who believe a competitor is using their patent without permission have to sue for infringement in each country where the patent is being infringed. This can be very costly.

The new European unitary patent (EUP), which could come into force next year, aims to rectify this. It allows a European patent holder to stop a competitor from infringing in all EU states with a single legal action. This sounds very sensible. But the way it is being implemented will harm innovation across Europe.

Under the EUP, a system of national patent courts will be set up. The verdict of any such court will be valid and enforceable in all countries that have ratified the treaty. It is, of course, important that their decisions are correct, unbiased and have a high standard of integrity. After all, when a court concludes that a patent has been infringed, the consequences can be serious. In 2006, for example, US company NTP obtained an infringement order against the maker of Blackberry mobile devices. The settlement cost Blackberry more than half a billion dollars.

So it is not a good omen that the signatories to the EUP include Bulgaria and Slovakia, two countries that are ranked very low in the World Economic Forum’s rating of judicial independence. Of 142 countries, Bulgaria is ranked 104th and Slovakia 116th. To put this in perspective, Zimbabwe is ranked 118th.

Why does this matter? When a patent holder initiates legal action, they generally get to choose the jurisdiction where the proceedings will take place. This creates an incentive for courts to gain a reputation for being favourable to patent owners, so as to attract business.

This “forum shopping” is already a real problem. In the US, the notorious Eastern District of Texas court is significantly more likely then other US patent courts to find in patent holders’ favour. Unsurprisingly, it is a popular venue for patent litigation. There is little to stop Bulgarian or Slovakian courts becoming the European equivalent.

Countries with low-ranked judicial systems could become popular venues for patent litigation

There is another problem too. Patent litigation diverts wealth and resources from production to legal services. When the EUP is introduced, this wealth will be diverted from the productive economies of Europe to the jurisdiction the patent action is held in. A notable beneficiary of this will be Luxembourg, which will host the EUP’s court of appeal.

Yet another issue is that in order to appeal against a ruling, companies will be obliged to carry out activities in Luxembourg. Consumer brands will thus have to brave the reputational risks of being forced to operate in a notorious tax haven; lower-profile companies may welcome an opportunity to avoid tax by transferring as much activity as possible into Luxembourg. The EUP is a gift from Europe’s taxpayers to the legal and tax-evasion professionals of Luxembourg.

Trustworthy legal systems support wealth creation by providing a predictable and consistent environment. The UK and other western European countries are blessed with such systems. Exposing their inventors and manufacturers to justice systems of questionable integrity will destroy one of their key business advantages. The economic cost will dwarf any administrative savings – estimated to be no more than €290 million a year in court costs, less than half the settlement paid by Blackberry.

Weak protection of intellectual property has major consequences. China is the world’s largest manufacturer but has a judicial independence ranking of 63 – and no top 100 consumer brands. By contrast, Germany is a smaller manufacturer, but boasts a judicial independence rank of 7 and has nine of the top 100 brands.

The EUP system was devised by distinguished jurists. One can only speculate why they have done such a poor job. Perhaps professional courtesy played a part; no European jurist would question the integrity of a foreign colleague’s legal system. The disproportionate influence that Luxembourg exerts on the European Commission must also have played a part.

The EUP undermines existing high-quality justice systems for a minor cost saving; it shackles western European economies to sub-standard legislatures; and it exposes companies to the risks of operating in a tax haven. It is a white elephant that will trample over productive economies of Europe.

This article appeared in print under the headline “Patently corrupt”