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Economic Cost-Benefit Analysis of a Unified and Integrated European Patent Litigation System, Final Report to the European Commission

Harhoff, Dietmar (2009). Economic Cost-Benefit Analysis of a Unified and Integrated European Patent Litigation System, Final Report to the European Commission 2009.

The patent system in Europe is still incomplete. Appropriating returns from patented technology is impaired by the fact that patent-holders may have to enforce their patent rights in multiple courts. Moreover, third parties interested in showing that particular patent rights have been granted erroneously are disadvantaged by having to initiate revocation proceedings in multiple jurisdictions.
Given that the successful pursuit of these two objectives can generate welfare gains for the European economy, a unified European patent litigation system has immediate appeal.
The current study seeks to provide approximate cost and benefit calculations in order to inform policy-makers in Europe about the choices they face in this important field of public policy. The study groups cost and benefit effects into the following categories: (i) effects from avoiding duplication of litigation; (ii) effects from changes in the demand for litigation, induced by changes in the cost structure; (iii) effects from changed incentives for patenting.
Towards performing an assessment of the first two effects, the report collects data from a variety of sources in order to support the estimates and to test the plausibility of a number of necessary assumptions. Given that no official data on the incidence, outcomes and cost of patent litigation exist, an effort is made to triangulate data and estimates in order to demonstrate that the approximations are justified.
The following results are particularly important. Avoiding duplication of infringement and revocation cases is likely to generate large benefits for the European economy. The results obtained here suggest that currently, between 146 and 311 infringement cases are being duplicated annually in the EU Member States. By 2013, this number is likely to increase to between 202 and 431 duplicated cases. Total private savings from having access to a unified Patent Court in 2013 would span the interval between EUR 148 and 289 million.
An assessment of the operating costs of the proposed Patent Court is obviously subject to a large number of caveats. Based on data from earlier efforts (in particular the Working Party on Litigation set up under the auspices of the European Patent Organisation), an upper-bound estimate for the operating costs of a court with a capacity of 940 cases indicates that the Court would cause operating costs of EUR 27.5 million.
Hence, the cost-benefit assessment focusing on avoided duplication leads to a highly positive evaluation of the proposal. Even if the low estimate of savings (EUR 148 million) is taken, the new system would create substantial benefits and reach a benefit-cost ratio of 5.4. However, this view may be unduly conservative, and the benefit-cost ratio could be as high as 10.5.
Additional benefits could flow in case of additional litigation activity, be it in terms of infringement or revocation actions. The availability of a low-cost litigation path offered by a unified Patent Court is likely to lead to additional activity from parties in countries which currently do not use the European patent system extensively. Moreover, the cost level of litigation in the unified Patent Court system is likely to be below the cost levels currently observed in some Member States and parties in these Member States are also likely to engage in more litigation activity in the medium-run. These effects will also contribute to generate private and public benefits.
The above estimates and considerations are based on the assumption that the unified Patent Court will offer litigation at roughly the same cost level as the three largest low-cost national systems. In a robustness check, the report explores to what extent the gains from saved duplication would be dissipated if the cost level were higher. The computations show that even with a substantial average cost increase, benefit-cost ratios remain above one, and for most scenarios considerably above one.
It is more difficult to predict cost-induced changes in the demand for litigation. The relevance of such changes will depend on the level and type of costs imposed on users of the new system. These will be mostly determined by the private costs for legal support and advice, but also by the fees levied by the Court itself. Measures to contain the private costs to parties in litigation are important, and the Presidency’s proposal includes a number of such measures which are discussed in the report with respect to their impact. A particularly promising measure is to admit representation of parties by specialized European Patent Attorneys. Another measure of importance is the contribution from the Community budget and from States which are not EU Member States to the Court’s budget, in order to keep fees at low levels.
The report also discusses – in a qualitative manner – effects which emerge from changes in patenting and litigation incentives. It is argued that effects will be beneficial if the unified patent litigation system puts emphasis on fast and low-cost proceedings, high quality judgement, and a fair balance between the legitimate interests of patent holders and alleged infringers. It is emphasized that particularly strong positive welfare contributions can be expected if an effective and rapid, low-cost revocation procedure is available. The latter feature should provide an effective means against strategic and (possibly) frivolous litigation activity which could be mounted in the future by “patent trolls”. The report also comments on particular design choices in the Presidency’s proposal.
To summarize, this report recommends strongly that the Presidency should proceed in its efforts to establish a unified and integrated patent litigation system for European patents and future Community patents. For conservative estimates of the relevant parameters, the economic benefits from such a system are likely to exceed the costs of the establishment and operation of the new court by a large multiple of between 5.4 and 10.5. Moreover, with prudent design choices it should be possible to implement a litigation system that will be balanced and supportive of overall efforts to improve the quality of patents in Europe.