How the UPC Courts Have Ruled on Security/ Bonds for Initiating Actions
“The handling of security provisions in UPC cases reflects a nuanced approach by different divisions.”
UPC Milan (IT) Local Division
An interesting decision of the Unified Patent Court’s (UPC’s) Munich Local Division, issued on April 23, 2024 (UPC CFI No. 514/2023), confirmed that “the prerequisite for a successful application (for security/bond) would be a demonstration that the financial circumstances of the other party give rise to fears that any claim for reimbursement of costs cannot be satisfied or that, despite sufficient financial resources, enforcement of a decision on costs appears to be impossible or fraught with particular difficulties.”
General Rule
The UPC Agreement stipulates that, upon request of the defendant, the Court may order the plaintiff in infringement proceedings on the merits to furnish adequate security for the legal costs and other expenses incurred by the defendant, which the applicant may be liable to bear. This provision is particularly pertinent in urgent proceedings, such as when the plaintiff seeks an order to produce evidence, to preserve evidence and to inspect premises or to freeze assets or request provisional and protective measures.
In these cases, the adequate security, or an equivalent assurance (by deposit or bank guarantee) is intended to ensure compensation for any prejudice suffered by the defendant where the measures to preserve evidence are then revoked, lapse due to any act or omission by the applicant, or where it is subsequently found that there has been no infringement or threat of infringement of the patent.
This is even more true, and the UPC shall order the applicant to provide adequate security for the legal costs and other expenses, as well as compensation for any injury incurred or likely to be incurred by the defendant, when the order to preserve evidence has been issued ex parte (i.e., without the defendant having been heard), unless there are special circumstances not to do so.
The Case
Network System Technologies LLC (“NST”), a non-practicing entity (NPE) based in Portland, Oregon, United States, started an infringement action before the UPC Munich Local Division pon January 3, 2024, against Texas Instruments Incorporated, Texas Instruments Deutschland GmbH, Volkswagen AG, and Audi AG on the basis of its European Patent No. EP1875683 entitled “Integrated Circuit with Data Communication Network and IC Design Method”.
In early March 2024, all the Defendants filed applications requesting the Court to order the Plaintiff to provide security.
The applicants (defendants in the proceedings on the merits) based their requests on the following facts:
- Network System Technologies LLC (hereafter NST) is a U.S. company with its registered office at 533 Congress Street, Portland, United States of America, and its actual administrative domicile and seat outside the EU.
- Enforcement of a judgment on legal costs would be impossible or only achievable with considerable difficulty for the defendants, incurring high legal costs.
- The financial position of the Plaintiff gives rise to legitimate and real concerns that a possible cost order might not be recoverable. NST is a small company with only two employees and an annual turnover of less than EUR 10 million. The Plaintiff does not have any physical assets, such as production facilities or means of production. Consequently, there are likely no assets that could be used to satisfy a claim for reimbursement of costs.
- The address of NST is a coworking space, demonstrating that the Plaintiff lacks any physical assets and has very limited liquid funds.
- There are multiple patent infringement actions pending in the United States and before the UPC, brought by the Plaintiff against other companies such as Qualcomm, Samsung, and Lenovo. These proceedings are very expensive and likely bind a large portion of the Plaintiff’s limited liquid funds. The parallel proceedings also further increase the risk that the Plaintiff cannot fulfil potential cost reimbursement claims of the Defendants if the present complaint is dismissed.
In reply, NST observed that:
- Protecting the rights of the Defendant should be balanced against the right of the Claimant to enforce its patent rights. An order to provide security can, depending on the circumstances, limit the Claimant’s access to justice.
- There was no risk that enforcement of a decision on costs would be impossible or difficult. The Applicants’ defence on this point was purely abstract and theoretical, since there were no indications that, in the event of a necessary enforcement of a claim for compensation against NST in the United States, difficulties are to be expected that would require the provision of security. As a general rule, the enforcement of a decision on costs of this Court in the United States is not impossible and does not face significant difficulties.
- The UPC Agreement and the Rules do not differentiate between parties domiciled within or outside the EU. The seat of a party could not be considered – neither directly nor indirectly – by reference to unspecified assumptions about possible difficulties in enforcing a decision on costs.
- The Plaintiff is a small and medium-sized entity (SME) and could be significantly limited in its ability to enforce its patent rights against the Defendants, especially if this Court required the provision of high security for costs. The Plaintiff has an annual turnover of below EUR 10 million and qualifies as an SME. Like many small technology companies, NST has office spaces that are appropriate and sufficient for its business.
- It is also true that the Plaintiff is engaged in expensive litigation in the United States and before this Court against other companies as well and in parallel.
- The Defendants did not demonstrate that NST lacks sufficient financial resources, and it was not incumbent upon the Plaintiff to disclose its assets and funds.
- NST purchased its patent portfolio from Philips at a very significant price, consistent with the market price of such a high-quality patent portfolio, stemming from a European leader in high-tech innovation. The European patent portfolio itself shall be considered a highly valuable asset, which could be seized by the Defendants.
- The Plaintiff has the financial resources to pay the legal fees and expenses for this costly patent litigation month after month, always on time and without hesitation.
The Decision
The Munich Local Division argued that the defendants had not provided any concrete evidence of the alleged difficulties in the future enforcement against NST of an order for reimbursement of legal costs.
In particular, the fact that the Plaintiff has its registered office in a non-EU country, i.e., in the United States, cannot be relevant, as this would constitute a form of a priori discrimination based precisely on the nationality of its registered office/domicile, which is not provided for in any source of law. No precise evidence has been provided as to the difficulty of enforcing UPC decisions on U.S. territory. In the United States, judgments of foreign courts and associated cost decisions can generally be recognized and enforced. It has not been submitted or is otherwise apparent that this could be different with decisions and orders of the UPC or is seriously to be expected.
Moreover, the defendants confined themselves to general allegations without providing any precise evidence of an actual risk of insolvency. NST’s lean organization was consistent with its business, primarily focused on managing litigation related to the infringement of patents acquired from Philips. The Plaintiff’s assets, on the other hand, include precisely those intangibles that could be seized at the Defendants’ initiative if the remaining part of NST’s assets were to become insufficient.
The Court concluded that there was no evidence that the Plaintiff was or will be insolvent at the time a cost decision will be rendered. The balance of interests was therefore in favor of the Plaintiff.
Other Cases
So far, security has been applied particularly when the Plaintiff requested ex-parte orders to preserve evidence or ex-parte orders for preliminary measures.
Below are some representative cases:
The UPC Milan Local Division, in its order to preserve evidence dated June 13/14, 2023, issued in the context of the ITMA trade fair (Oerlikon textile G.M.B.H. & co. k.g – Bhagat group/Himson engineering private limited; EP2145848B1 entitled “false twist texturing machine”), decided “not to condition the immediate effectiveness of the measure on the prior deposit of security by the applicant. In fact, the measure is aimed at acquiring evidence of the alleged infringement and therefore does not, in itself, have punitive or restrictive content for the activities of the defendant. Furthermore, the applicant has carried out all necessary checks for the purpose of submitting this request in a very short period – in just five days – and the deadline for the fair is set within one day of the adoption of this decision, with the objective compromise of the possibility of its execution, if conditional on the payment of security or the provision of equivalent guarantee. Lastly, the applicant is part of a large industrial group, capable of compensating for any damages caused to the defendant in the execution of this measure”.
In another order from the UPC Milan Local Division to inspect premises and to preserve evidence dated September 25, 2023 (Progress Maschinen & Automation AG – AWM S.r.l./Schnell S.p.a); EP2726230 entitled “Method and device for continuously producing a mesh type”), the Plaintiff was requested to deposit the amount of Euro 50,000, equal to 2.5% of the value of the case of Euro 2,000,000, in order for the order to inspect premises to become effective.
A UPC Paris Local Division order to preserve evidence issued on November 14, 2023 (C-Kore System Limited – Novawell); EP 2265793 entitled “Subsea Test Apparatus, assembly and Method”, drafted by the Italian Judge, Ms. Zana), requested a relatively low amount as security: “the Court orders C-KORE to provide adequate security – also as a condition to the enforceability of this order – for the legal costs and other expenses and compensation for any injury incurred or likely to be incurred by the Defendant, by depositing the amount of Euro 20,000” (around 1.4% of the value of the case of EUR 1,523,000.00).
A less generous approach was adopted by the UPC Düsseldorf Local Division, which, in the order for provisional measure dated December 11, 2023 (Ortovox Sportatikel GmbH. – Mammut Sports Group AG, Mammut Sports Group GmbH; EP3466498B1 entitled “Search device for avalanche victims and method for operating a search device for avalanche victims”), stated that the order was “only enforceable if the applicant provided security in favour of the defendants in the form of a deposit or bank guarantee in the amount of EUR 500,000”, therefore requesting the same amount as the value of the case (which was indeed 500,000).
The same applied to the decision of the UPC Düsseldorf Local Division – order for provisional measure dated 30 April 2024 (10X Genomics, Inc. – Curio Bioscience Inc.; EP2697391B1 entitled “Method and product for localized or spatial detection of nucleic acid in a tissue sample”), where the Court conditioned the enforceability of the Order to the deposit by the Defendant and in the form of a deposit or bank guarantee of “security in favour of the Defendant in the amount of EUR 2,000,000” (which was also the value of the case).
Interestingly, a recent decision of the UPC Munich Local Division issued on May 2, 2024, concerning the SEP injunction against Lenovo, requested Interdigital, the plaintiff, to provide security for €1 million with respect to smartphones and €3 million for tablets and personal computers. Those numbers did appear very low, but the reason for that is not known yet.
A Case by Case – and Court by Court – Analysis
In conclusion, the handling of security provisions in UPC cases reflects a nuanced approach by different divisions. While some opt for relatively modest amounts to ensure enforceability without unduly burdening parties, others demand security equal to the value of the case. Recent decisions, such as the Munich Local Division’s injunction against Lenovo, underscore the variability in security requirements, with figures sometimes appearing unexpectedly low. This diversity in approaches highlights the complexity of balancing the interests of all parties involved and emphasizes the importance of case-specific considerations in determining appropriate security measures within the UPC framework.
Especially when there is a proceeding on the merits, defendants should provide the court with concrete evidence of the alleged difficulties in future enforcement against the plaintiff of an order for reimbursement of legal costs to request that the court require the plaintiff to file a security.
