To opt out or not to opt out, that is the question………

Which contracts may be impacted?

The UPC system potentially impacts any agreement (existing or future) that includes a licence of a European Patent (whether alone or as part of a global portfolio), and will be a particular concern where the licensed European Patents are key to the business. Parties to licensing, collaboration, development and other core commercial contracts will currently be considering not just their patent filing strategies in the context of this system change, but whether and how both future and historic contracts should address the conduct of litigation, and perhaps most importantly of all, the potential to opt-out of the system entirely. 

Aims of the UPC system

The UPC system aims to reduce and streamline litigation and its associated costs, with a core aim being that a dispute between the same parties on the same patent will be litigated only once, driving a single (consistent) outcome to that patent dispute. A UPC-wide finding of infringement can be made, and consequent relief (including UPC-wide injunctions) can be granted. However central litigation (with the associated risk of central patent revocation in all UPC jurisdictions) may well be very unattractive for key patents, as may the default position that patent holders (rather than licensees) can take strategic decisions on prosecution / litigation.

What is the opt-out?

All current and future European Patents will fall under the new UPC system, in addition to newly created Unitary Patents. However, for a limited time European Patents and related SPCs can be opted-out of the UPC system. Therefore, both licensors and licensees need to consider whether they can and should avail themselves of this opt-out. In the latter case contractual mechanisms may well need to be added to existing or future contracts to control the exercise of that right and a potential right to opt back in (which notably would then preclude any further opt-outs under the system), as by default it is the patent holder who is entitled to exercise the right to opt-out.   

Opt-out timing is critical as no opt-out may be exercised when an action is actually pending under the UPC system. The window for the exercise of an opt-out commences once Germany ratifies the UPC Agreement (expected in Q4 2022). This kicks off a three month sunrise period during which opt-outs can be made before the UPC system goes live. Opt-outs can continue once the system is live, for a transitional period (between 7 – 14 years, to be determined once the system is up-and-running).  

Why might opt-out be important?

Obviously the risk of central revocation of a core patent and associated loss of value are likely to be important factors in any decision to secure the right to exercise the opt-out or to take the decision now to do so. In addition, the strategic use of different national systems for enforcement has long been a benefit of the existing country-by-country patent litigation system in the EU, and one that parties may wish to retain. It is also notable that at present not all EU members are participating, while a number of non-EU countries (who are ineligible to participate) also utilise the European Patent system, meaning the UPC does not provide a complete 'one-stop-shop' for patent disputes in Europe. Further, it seems inevitable that in its infancy the new UPC system will be caught up in jurisdictional challenges, and many parties may prefer to observe how the system develops from the relative 'safety' of being opted-out.

Finally it is clear that different considerations may apply to the approach taken by early stage pharma/biotech, established pharma players, and parties to complex technology platform agreements, including where joint ownership is in play. In each case careful consideration of the landscape of contractual arrangements and the underlying patents is recommended.

Next steps

We routinely advise both licensors and licensees on complex transactional matters across the life sciences and health care sector. Please contact the authors or the Hogan Lovells attorneys with whom you regularly work for specific guidance regarding your key contracts.

Authored by Penny Powell, Katie McConnell, and Bonella Ramsay.