Europe down the plughole?

The Select Committee for the Unitary Patent meets next week to discuss fee proposals that have been widely leaked.

The risk of damage to the reputation of Europe, and the finances of the European system, is extremely high if either proposal is adopted, both of which appear to reflect more fear of the future than a desire to improve the European system.  

Growth rates for European patents (direct filed and PCT regional phase) are already dismal compared with other major economies such as China and USA [EPO annualised growth rate over 2008-2013 was 0.3% compared with 36.9% for China and 5.1% for USA]. No amount of misleading press releases can hide this fact.

This dismal performance reflects not only the state of the European economy (which affects both the resources of European industry to file patents and the attractiveness of Europe as a market for external applicants), but also the reputation of Europe as a high cost patent system. Decisions are often based as much on reputation as reality: and the reality does not help Europe’s reputation.  

If the unitary patent too gets a reputation for being expensive, this will affect user’s decision on whether or not even to apply. Even though the alternative will exist of going for London Agreement countries, the reputation of high costs in Europe will spill over to affect demand overall.

This damage to reputation  will apply both to users within Europe and those outside Europe.

This could set the system on a death spiral:-

• Perceived added expense to an already expensive system acts as a deterrent to choosing to protect in Europe, leading to a reduction in the number of European applications filed.
• A reduction in the number of European applications filed affects both those EPC countries inside the unitary system and those outside, since if there are fewer European patents there will be fewer national validations, including fewer Italian patents and fewer Spanish patents.
• Fewer patents leads to lower renewal fee income for the EPO from granted patents.
• Lower renewal fee income for granted patents leads to more income being required from European applicants in the form of higher procedural fees and higher internal renewal fees.
• Higher procedural fees and higher internal renewal fees leads to Europe being perceived as even more costly leading to lower demand.
•  Lower demand leads to still higher fees to cover EPO liabilities.
• The system spirals to its doom such that the EPO becomes financially unsustainable and national offices have to look to their liabilities for “special financial contributions” under Article 40 EPC.
• National offices find that the reputation for high costs in Europe has led to a reduction in their national filings too.
• No money is available and government have to step in to bail out a system that would have been sustainable had fees not been set at a level guaranteed to deter customers.

Of course, if the unitary patent is abandoned that too could lead to a different death spiral:-

• Perceived failure to reduce the cost of an expensive system acts as a deterrent to choosing to protect in Europe leading to a reduction in the number of European applications filed.
• A reduction in the number of European applications filed affects all EPC countries.
• Fewer patents leads to lower renewal fee income for the EPO from granted patents.
• Lower renewal fee income for granted patents leads to more income being required from European applicants in the form of higher procedural fees and higher internal renewal fees.
• Higher procedural fees and higher internal renewal fees leads to Europe being perceived as even more costly leading to lower demand.
•  Lower demand leads to still higher fees to cover EPO liabilities.
• The system spirals to its doom such that the EPO becomes financially unsustainable and national offices have to look to their liabilities for “special financial contributions” under Article 40 EPC.
• National offices find that the reputation for high costs in Europe has led to a reduction in their national filings too.
• No money is available and government have to step in to bail out a system that would have been sustainable had the opportunity to send a message on costs been taken.

In short, the discussions in the forthcoming Select Committee meeting are critical to the European patent system.

The proposed Top 4 [Top 4 in later years, with matching to the EPO internal renewal fees in the early years] represents a significant increase over the EPO's current income from patent renewal fees. The proposed Top 5 represents a scandalous attempt to freeze out the very users the unitary patent was intended to benefit. Both proposals penalise SMEs who could not rationally choose a unitary patent given fees of such magnitude.

If either of these proposals is adopted, the damage to the reputation and the finances of the European Patent Office (and national offices) will be extreme.

Even Top 4 is high, since it includes two of the most expensive countries [Germany and Netherlands].

Please, Select Committee, send a message that you are serious about the future of the European patent system and decide on a renewal fee schedule Top 4 or below, and review it in a few years’ time to determine whether it is sustainable based on the pattern of take-up.  

Do not be driven by fear of what might happen to decide on fees so high they cannot meet the requirements of the regulation, and that guarantee immense damage to Europe. 

Choosing an appropriate level of renewal fees could lead to a virtuous circle of improved confidence and an improved environment for European business, rather than a self-inflicted death spiral.

A fair assessment

Yet again, in a recurring ritual, the EPO has released a misleading press release concerning filing statistics. It would appear that a more informative press release might run on the following lines.

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European Patent Office receives record number of patent filings – situation returning to normal?

Patent applications at the EPO grew by 2.7% in 2014, hitting a new record high of nearly 152 000, a mere 0.6% higher than the previous record in 2010 [that year numbers were inflated by introduction of the late unlamented divisional rules, which represented a tax on innovators at a time when innovators could least afford it].

In 2014 applications from European applicants grew by 2.2% and from non-European applicants 3.2%. These increases constitute a significant indication of a recovery in European industry, but mostly in non-European industry. [Over the period 2011-2015 applications from EPC applicants increased by 4.4%, whereas those from non-European applicants increased by 8.4%. In 2011 EPC applicants filed 50.4% of applications whereas in 2014 this has dropped to 49.5%].

As yet the recovery is weak. Had the trend prevailing for the 10 years prior to 2008 continued there would have been roughly 30,000 more applications in 2014 than there actually were. The period since 2008 represents relative stagnation.

European filing numbers still remain depressed due to the state of the economy. The following graph shows that EP filing numbers and EU GDP [EU 28 on a PPP basis – source, Eurostat] correlate closely up to 2013 [2014 data not yet on Eurostat].

It should be remembered that application numbers reflect not only the innovation within Europe: but also the attractiveness of Europe as a market. When Europe again becomes a thriving market and a place where people want to invest, the filing numbers should rise again.

The following graph shows the ratio in €m of EU-28 GDP per application. It is evident that Europe became a much more patent intensive region in the run up to the millennium: but since then has remained relatively static [apart from the year of the divisionals].



The prospect of a unitary patent [a single instrument covering a large proportion of the European market] may lead to strong growth, since this may make a European patent a more valuable asset.

As a final point it is worth noting that the term “patent filings” used in previous press releases is now thoroughly discredited as a useful measurement of anything. Combining European applications made and PCT applications made has little relevance to demand for European patents, as is indicated by the ever declining proportion of PCT applications that enter the European regional phase [a further indication that Europe has to come to grips with its place in the world].

In an effort to improve transparency the EPO will henceforth cease using the misleading “patent filings” metric and instead will quote numbers that mean something.

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Let us see what happens next year.