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Is it lawful to limit the recovery of legal fees by a successful party?

In a recent judgment of the Court of Justice of the European Union (“CJEU”) (C-57/15 United Video Properties – 28 July 2016) the CJEU has provided guidance on whether capped fee recovery provisions breach Article 14 of the Directive on the Enforcement of Intellectual Property Rights (2004/48/EC).

The case involved a decision of the Belgian courts following proceedings between United Video Properties Inc. (“UVP”) and Telenet NV (“Telenet”) concerning the legal costs that UVP must reimburse to Telenet after discontinuing an action brought against the latter in relation to patents. The Belgian courts ordered that UVP pay the sum of €11,000 to Telenet which represented a small fraction of the costs incurred by Telenet, being €185,462.55 in respect of lawyers’ fees and €44,400 in respect of the assistance provided by “an agent specialised in the field of patents”. The limitation was due to the scale of cost recovery employed in litigation in Belgium. Naturally, Telenet was not pleased with such a parsimonious recovery arguing that the Belgian legislation severely restricting costs recovery is contrary to Article 14 of Directive 2004/48.

Article 14 of Directive 2004/48, entitled ‘Legal costs’, provides:

‘Member States shall ensure that reasonable and proportionate legal costs and other expenses incurred by the successful party shall, as a general rule, be borne by the unsuccessful party, unless equity does not allow this.’

The question was raised by Telenet of whether the limited costs recovery provisions applicable in Belgium were in breach of Article 14.

In the circumstances, the hof van beroep te Antwerpen (Court of Appeal, Antwerp) decided to stay the proceedings and to refer, inter alia, the following question to the CJEU for a preliminary ruling:

‘Do the terms “reasonable and proportionate legal costs and other expenses” in Article 14 of Directive 2004/48 preclude the Belgian legislation which offers courts the possibility of taking into account certain well-defined features specific to the case and which provides for a system of varying flat rates in respect of costs for the assistance of a lawyer?’

The CJEU stated:

“Legislation providing for a flat-rate of reimbursement of a lawyer’s fees could, in principle, be justified, provided that it is intended to ensure the reasonableness of the costs to be reimbursed, taking into account factors such as the subject matter of the proceedings, the sum involved, or the work to be carried out to represent the client concerned…On the other hand, the requirement that the unsuccessful party must bear ‘reasonable’ legal costs cannot justify, for the purposes of the implementation of Article 14 of Directive 2004/48 in a Member State, legislation imposing a flat-rate significantly below the average rate actually charged for the services of a lawyer in that Member State.”

“The dissuasive effect of an action for infringement would be seriously diminished if the infringer could be ordered only to reimburse a small part of the reasonable lawyer’s fees incurred by the injured right-holder. Thus, such legislation compromises the principal aim pursued by Directive 2004/48, of ensuring a high level of protection of intellectual property rights.”

Roy Crozier, partner in the Intellectual Property Group, says: “The case is interesting for right-holders and their legal advisors in the UK given the costs recovery limitations of the Intellectual Property Enterprise Court (“IPEC”).   I look forward to guidance from the UK courts as to whether the costs capping regime in IPEC, in which there is a modest cap at each state of the litigation, breaches Article 14.  For example, the costs cap in the case of an application to court is £3,000 which in many cases will be a fraction of the costs reasonably incurred.