Volkswagen AG v Network System Technologies LLC, Court of Appeal of the Unified Patent Court, 17 September 2024, Case nos. APL_25922/2024, UPC_CoA_218/2024; APL_25924/2024, UPC_CoA_220/2024; APL_25928/2024, UPC_CoA_222/2024
The Court of Appeal of the UPC has overturned an earlier decision of the Munich Local Division (LD) and ordered Network System Technology (NST) to provide security for legal costs and other expenses incurred by Volkswagen.
Background
On 1 March 2024 Volkswagen filed applications under Art. 69 (4) of the UPC Agreement (UPCA) and Rule 158.1 of the UPC Rules of Procedure (RoP) requesting the Munich LD to order NST to provide adequate security for legal costs and other expenses incurred by Volkswagen.
The Munich LD denied the applications. The court held that Volkswagen confined themselves to general allegations without providing sufficient evidence of an actual risk of insolvency, and that there was no evidence that NST was or will be insolvent at the time a cost decision would be rendered. NST’s assets included the patent portfolio it had acquired from Philips and that this could be seized if the remaining part of NST’s assets were to become insufficient. Further, Volkswagen had provided no precise evidence as to the difficulty of enforcing UPC decisions on US territory.
Volkswagen appealed and requested that the Court of Appeal set aside the impugned order as well as order NST to provide security for costs.
Decision
The Court of Appeal outlined that under Art. 69(4) UPCA and Rule 158 RoP, the court must determine whether the financial position of the claimant gives rise to a legitimate and real concern that a possible order for costs may not be recoverable and/or the likelihood that a possible order for costs by the court may not, or in an unduly burdensome way, be enforceable. Further, the burden of substantiation and proof why an order for security was appropriate was on the defendant.
However, once the defendant had presented their evidence in a credible manner, it was then up to the claimant to challenge those reasons and facts in a substantiated manner. The Court of Appeal stated that Volkswagen had sufficiently substantiated what efforts it had made to search for all publicly available financial information on NST. Requiring that Volkswagen provide “precise evidence” that NST was, or would be, insolvent at the time a cost decision was rendered would impose too high a standard of proof.
It was sufficient for Volkswagen to show that it was credible that NST’s financial situation gave rise to a legitimate and real concern that a possible order for costs may not be recoverable. It was then on NST, as the party having access to all relevant information on its financial situation, to provide further information on the availability of its assets to comply with a possible cost order, which it failed to do.
NST’s patent portfolio also could not reasonably be considered a sufficient source of recovery for any cost order; its purchase price was held to be unindicative of its value because most of the patents would have expired by the time proceedings would have ended. The Court of Appeal also stated that the Munich LD had failed to take into account that if the proceedings failed, either because there was no infringement or the patents were held to be invalid, the value of the patent portfolio would be even lower, in case of invalidity even to zero. The costs of any seizure of the portfolio were also relevant, as enforcement through seizure of patents is done per country separately, involving further costs and with very uncertain returns.
It was also wrong to say that an SME should not be required to provide security for costs in favour of a massive automotive company. The court held that the relative financial position of the parties is not a criterion under Rule 158 RoP, and it was even less of a factor where the limited level of funding provided to a special purpose patent enforcement entity (as NST was) was a deliberate business decision. As NST admitted that sufficient finances to cover possible cost orders should be part of an appropriate financial funding of its business model, the obligation to provide security for costs was not considered to be an additional burden hindering NST’s access to justice.
For the reasons set out above and others, the Court of Appeal set aside the impugned order and ordered NST to provide security for costs. The amounts for this security were 50% lower than what Volkswagen had requested, as the court accepted NST’s argument that Volkswagen and Audi are both sued in parallel cases and use the same representatives and hence costs can be shared between them.
Implications
Whilst Volkswagen was successfully able to shift the burden of substantiation and proof onto NST, with the court helpfully clarifying that providing precise evidence that the claimant was or would be insolvent was too high a burden, a smaller company, with less means, may be unable to shift that burden, with the Court noting that “Volkswagen sufficiently substantiated what efforts it made to search for all publicly available financial information on NST.” If it is on an efforts basis (whether it be “reasonable” or “best” efforts), would it be enough for a smaller company to demonstrate the investment of significant time and money to substantiate its request, even if it fell short of obtaining all publicly available financial information of the other party. This remains to be seen.
The Court of Appeal did not comment on Volkswagen’s claim that any cost orders would not be recognized in the event of enforcement against NST as a US-domiciled company, indicating that the UPC’s stance remains that it does not believe that there would be issues with enforcing cost orders against US companies, as was stated in ICPillar v. Arm (UPC_CFI_495/2023, ORD_23494/2024), where “the Court did not identify any particular difficulties in enforcing the UPC’s decision in the United States of America.”
However, it may be less likely for EU-domiciled parties to be ordered to give security for costs than US-domiciled parties. In Plant-e v Arkyne (UPC_CFI_239/2023, ORD_586897/2023), the Court outlined that the aim of providing security is to ensure enforceability of cost orders against non-EU resident claimants, and that a security of costs order based solely on material unenforceability should be awarded in exceptional circumstances only.
However, this was a decision from The Hague LD, which appears to have demonstrated some ‘couleur locale’ in adopting the strict approach taken by the Dutch courts to such issues. This has not necessarily been followed by other UPC courts, with, for example, the Hamburg LD in Ballinno v UEFA (UPC_CFI_151/2024) holding that for claimants domiciled in the EU, the insolvency risk is the relevant factor for awarding security for costs.
Lastly, whilst it may appear to be negative, this is a rather balanced decision for claimant SME’s. Despite NST arguing that having to provide security may prevent it from asserting its IP rights, the court found that it is all the more not a factor given that NST’s limited funding was due to the way it was deliberately set up.
In Ballinno v UEFA, which was another case where an SME was required to provide security for costs, the court held that it was a concern that the patent in suit was assigned to the claimant only some months after the assignor had entered into a pre-trial correspondence about a possible patent infringement with the defendants, suggesting that the reason for the transfer might be to facilitate the litigation without the claimant having to incur financial risk.
Therefore, whilst in both cases an SME was not able to successfully advance the argument that it should be protected from such orders to help SME’s assert their IP rights, an important reason for this was due to the way in which the claimants were set up.
Going forwards, the argument that one of the stated objectives of the UPCA is to facilitate the enforcement of patent rights by SMEs may hold more weight for SMEs which were not deliberately set up so as to have limited assets/capital. This is despite the reasoning set out in the Volkswagen order, which states that “the relative financial position of the claimant as compared to that of the defendant is not as such a criterion under R.158 RoP”.
The order can be read here.
