Report of EPO Finances Committee
A meeting of the Budget and Finance Committee 25th October was attended by three members of the Committee (Winter, Schober, Boff), and the Committee has been occupied in preparing for this.
Earlier in the year the Committee assisted in discussions with the EPO concerning a “non-paper” relating to changes in fee structure and support for micro-entities. This non-paper has reappeared as document CA/63/23 which was discussed at the BFC, but other documents raised at the BFC are relevant and discussed in the following.
CA/63/23 – Fee-related support measures for micro-entities and review of the fee policy https://information.patentepi.org/uploads/2304/ca-63-23-en.pdf
Background
CA/63/23 proposes:
- a system of reduced fees for individuals, micro-entities, universities, and public research organisations;
- to change procedural fees, increasing for example the 3rd and 4th renewal fees by ~30%; other selected fees by 4% or more, and with a promise of no fee increases in 2025.
This proposal has been given a favourable opinion by the Budget and Finance Committee, although with some dissenting voices. It will be discussed at the Committee on Patent Law 16th November 2023.
The proposal on reduced fees for selected applicants appears poorly targeted, liable to distort applicant behaviour, insufficiently researched and costed, and liable to increase fees for other applicants.
The proposed change in fee structure will affect user cost in the early years of an invention.
Existing support for micro-entities
Support at varying levels and by various means is provided at national level and, for some, at an EU level.
At the EPO level, support is relatively small and consists of:-
- Rule 6 language related reductions in fees for eligible entities [€3.1m]
- Unitary patent language related “compensation” for eligible entities [€0.2m]
- A reduced appeal fee for eligible entities [€0.1m]
- Reductions in search fees charged to national offices on searches performed for eligible entities [€5.7]
(costs are indicative total cost from Annex 1 of CA/63/23).
Eligible entities for all such support are applicants who are:
- natural persons;
- small and medium-sized enterprises as defined by the European Commission Recommendation 2003/361 of 6 May 2003, i.e. staff < 250 persons, turnover < EUR 50m and/or balance sheet < EUR 43m, no more than 25% of capital held by another company;
- universities or not-for-profit research institutes
For the language related support, the applicant must be domiciled in (or optionally for Rule 6, national of) one of the 38 EPC states.
The effectiveness of the largest value item (reduction in search fees to national offices) must be questioned. The fee charged to the national office is indeed reduced for up to 400 cases a year for eligible entities. However, since for many of the national offices concerned the fee normally charged for search is below the reduced fee charged to the national office, the entity concerned never sees any benefit [see discussion of CA/55/23 below].
Problems with the proposal in CA/63/23
The proposal is poorly targeted.
In discussion of the non-paper it was pointed out to the EPO that in the US there is a lifetime limit of four applications to be able to claim micro-entity status. The proposal introduces a limit of five applications in the previous five years. However this still does not appear to target “those innovative entities with limited experience of the European patent system” that CA/63/23 is aimed at.
The proposed reductions are not limited geographically and could be claimed by entities from around the world. Is it right that European applicants should subsidise non-European entities?
The proposal is liable to distort applicant behaviour
In discussion of the non-paper it was pointed out to the EPO that in the US there are complicated rules concerning the relationships between parties to prevent someone claiming micro-entity status while acting on behalf of a larger entity. There are no such provisions in CA/63/23, and it is easy to imagine that some applicants will change their behaviour.
For example:
- for an SME (not eligible for a reduction) it could be worthwhile filing in the name of a director;
- for a university that had filed more than five applications in the previous five years (not eligible for a reduction) it could make sense to file in the name of inventors, or a company set up to deal just with one invention or group of inventions.
The provisions of EU Commission Recommendation 2003/361 include some provisions for dealing with related entities that might restrict some structures. However some people are prepared to get very complicated just to save a small amount of money – because a small amount of money a lot of times becomes a large amount of money.
The scope for distortion is large, and this makes the total cost to the EPO difficult to assess.
The proposal is insufficiently researched and costed
It has become apparent that the EPO do not know how many entities might claim fee reductions.
For “compensation” under the UP, the support has been embarrassingly successful. To date ~5% of cases have claimed compensation in contrast to the ~2% forecast by the EPO. This of course may change as small entities have been disproportionately likely to choose the unitary route.
What is clearly not considered by the EPO is how applicant behaviour might change because of a general fee reduction not linked to the language regime of the EPC.
Reduced fees for one applicant, means increased fees for other applicants.
Despite their financial health (see below) the EPO’s principal source of funds is applicant fees. If the EPO ever get to the position that they have more money than they prudently need, reducing costs for all should be the aim.
Irrational outcomes
Under the proposal a billionaire director of a multinational company could file for a patent in their own name and get reduced fees, whereas an SME having 10 employees will get no reduction. Do the rich need subsidies?
Alternative proposals
There are different ways that users can be supported other than by subsidy. One of the principal problems for new entrants to a market is timing. In the early years costs come in while revenues do not. A system of partial deferral of fees could permit applications to progress without costing the EPO so much in lost fees, with the need for other applicants to meet the shortfall. At a time when the EPO is sitting on extremely large prepaid fees while waiting to do the related work, this offers a potential solution. The President sent a letter to the BFC https://information.patentepi.org/uploads/2304/231019-paper-on-deferral-of-fees-for-micro-entities-president-letter-to-bfc.pdf as attached with a proposal on these lines. This is not the only proposal that might be made.
CA/68/23 – financial study https://information.patentepi.org/uploads/2304/ca-68-23-en.pdf
The EPO have previously commissioned financial studies to indicate the health of the EPO and to provide a 20-year view on how that health would develop. The latest study states that the EPOs finances are sound and liable to improve further, but that the principal risks are macroeconomic shocks that may affect the investments of the EPO and pension fund.
The study highlights the rapid growth in stock and demand, and the effect this is having on timeliness. It is noted that production is down, driven both by a decrease in the number of examiners and a decrease in examiner productivity.
CA/55/23 – Working agreements on search co-operation https://information.patentepi.org/uploads/2304/ca-55-23-en.pdf
This paper reviews the fees charged to member states who use the EPO as a search authority. The formula used is to some extent reasonable.
As mentioned above there is alleged support for micro entities which is in the form of a reduction in the search fee charged to the national office of 80%. This looks like generous support, however for many national offices concerned the fee normally charged for search is below the reduced fee charged to the national office, the entity concerned never sees any benefit. There may be offices where the SME will get the bulk of the value of the discount, but these do not include the largest users of the system where it is evident that the national office benefits more than the SME.
Other matters
As mentioned above, initial information on the UP indicates a higher use of the system by SMEs than had been anticipated and hence higher payments in compensation. In addition, the effect of the delayed start to the system is that for 2023 the national offices will see no share of the renewal fees, as start up costs had to be covered.
As SMEs normally have a tendency to validate in few countries, the high uptake by SMEs is likely to lead to an increase in income by the EPO from those applicants, and hence lower pressure on applicant fees. It is however too soon to judge the overall financial effect of the new system on the EPO.
