July 1, 2016

UPC and ISDS: who would have to pay the damages awards?

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Investment lawyer Pratyush Nath Upreti argues that investors will be able to use investor-to-state dispute settlement (ISDS) to challenge decisions of the Unified Patent Court (UPC). [1] Investors could for instance use a Dutch bilateral investment treaty to challenge UPC decisions. Upreti identifies Dutch investment treaties as suitable for treaty shopping and warns for more frivolous IP litigation in investor-to-state dispute settlement.

This raises a question. Who would bear the litigation costs and damages awards?

If investors use a Dutch investment treaty the Netherlands will be the respondent. UPC decisions may regard the whole UPC area (almost the whole EU). ISDS damages awards may include expected profits. The Netherlands could end up having to pay litigation costs and damages awards including expected profits for almost the whole EU.

Regulation 912/2014, establishing a framework for managing financial responsibility linked to investor-to-state dispute settlement tribunals established by international agreements to which the European Union is party, would not apply, as a Dutch investment treaty is not an EU treaty. There does not seem to be a comparable framework for ISDS cases regarding the UPC. That is understandable. Who would like to pay for the too liberal investment treaties of an other UPC member state?

Even if an ISDS / ICS case would be based on an EU treaty (like EU-Canada CETA, after ratification) it is uncertain whether Regulation 912/2014 would apply. The substantive patent rules on which the UPC will base its decisions will not be EU law, and not all EU member states are party to the UPC. [2]

The UPC – ISDS combination may lead to disproportionately high costs (unrelated to their market) for UPC member states. Imagine Luxembourg (population 580.000) confronted with ISDS damages awards regarding almost the whole EU.

On their own and together UPC and ISDS may lead to an upward trend regarding patentability. See Unified Patent Court a mistake of historic dimensions? and EU commission goes into denial mode regarding effect ISDS on software patents.

Notes

[1] According to Upreti, the combined reading of the preamble and article 1 of the UPC makes clear that for European Patents, the Unified Patent Court is the national court of contracting member states.

[2] For the approach explained by Upreti, EU treaties with ISDS / ICS, like CETA, would not be necessary. However, EU investment treaties like CETA would expand the coverage of ISDS / ICS, would bring EU decisions under the scope of ISDS / ICS and would make it impossible for EU member states to withdraw from ISDS /ICS.