Latest EPO financial study suggests no harmonious future

Christoph Ernst, Vice President of the Directorate-General for Legal and International Affairs at the European Patent Office, does not beat around the bush. In September, at the annual conference of the German Association for the Protection of Intellectual Property (GRUR) in Frankfurt, Ernst said, “The EPO has good revenues but also high liabilities.”

This is the conclusion of the EPO Financial Study 2019, presented by consultancy Mercer and Oliver Wyman this summer. The study looked at the EPO’s financial health for the period 2018 to 2038. The EPO published similar studies in 2011 and 2016.

One of the most important findings of the current study was that pension payments will increase by 2038. In fact, they could perhaps triple, and will no longer be covered by cash reserves. This is partly due to consistently low interest rates on provisions and the quicker maturity of pension schemes as more staff reach retirement age.

4.8 billion euro gap

The calculations are based on four possible scenarios for global economic development over the next 20 years.

1) The ‘optimistic’ scenario assumes continued strong economic growth of 3.7% in applications and an annual inflation rate of 2%.

2) The ‘economic recovery’ scenario assumes an economic recovery and the associated increase in patent applications of 1.7% per year and an inflation rate of 1.7%.

3) The ‘economic cycle’ scenario forecasts an economic recession from 2020 and a normalisation from 2025 onwards. In this case, the study predicts a growth in applications of 0.9%.

4) The ‘stress’ scenario envisages a global recession with a resulting drop in patent applications of -0.3% and an inflation rate of 1.2%.

According to the study, in all scenarios except the ‘optimistic’ scenario (scenario one), there will be a gap of varying size between revenues and liabilities. Depending on the scenario, these vary from 1.6 billion euros (‘economic recovery’ scenario two) to 3.6 billion euros (‘economic cycle’ scenario three) and 4.8 billion euros (‘stress’ scenario four).

At the 161^st meeting of the Administrative Council, president António Campinos made an announcement. According to well-informed EPO circles, Campinos said he wished to use scenario three, ‘economic cycle’ as a basis for future measures. Here, a global recession and capital market crisis from 2020, followed by a weak recovery until 2038, would result in a coverage gap of 3.6 billion euros.

In addition, the president is planning a buffer of 2 billion euros.

A fiscal approach

In the run-up to the Administrative Council meeting, Campinos submitted proposals for 17 possible measures in response to the findings of the EPO Financial Study 2019. The proposals should help cushion any coverage gap. JUVE Patent has seen the internal document, which contains proposals for IT and service fee optimisation. This is as well as measures relating to employee salaries and pensions.

António Campinos

The proposals include, for example, the gradual increase of retirement age. The idea of a solidarity tax being introduced for pensions and salaries has been suggested. Furthermore, Campinos suggests reducing the career progression budget. This would mean aligning future benefits for staff profiting from the old pension scheme, to the staff for which the new pension scheme applies.

JUVE Patent contacted the EPO for comment. However, the organisation states that it is unable to comment on issues under internal discussion. A decision has not yet been made. Proposals will be discussed with stakeholders in the coming months, according to an internal document seen by JUVE Patent. Stakeholders include the Budget and Finance Committee and the advisory bodies of the member states.

Opening old wounds

Future plans notwithstanding, measures relating to the workforce has brought EPO staff representatives into the arena. This is particularly regarding the discrepancy between harsh consequences for employees on the one hand, and low fee increases on the other.

The financial plan for 2020 provides for a 4% increase in patent application fees in the coming year from 1 April. However, for subsequent years no further fee increases are listed.

JUVE Patent has seen a letter to staff from the Central Staff Committee (CSC). Why, it asks, does the EPO not plan to increase the application fees every two years to compensate for inflation, as it has done in the past? This could close the forecasted gap.

But, according to an internal paper that answers 40 of the most frequently asked questions (FAQs) on the EPO financial study, management takes a different view. It says it is not possible to budget for a regular increase in fees. This is because the Administrative Council could object to a fee increase at any time.

However, the paper admits that “potential fee adjustments beyond the fee increase in 2020 may be considered.”

Overall, say staff representatives, the newest EPO financial study is based on “unrealistic assumptions.” This applies, among other things, to the expected increase in salaries. Salaries are calculated at 0.5% above inflation in the long-term. Career progression adds another 1.74%.

“It seems very unlikely that the recent negative trend in career progression will turn any time soon,” says the CSC. Only a few employees would actually benefit from the new career system introduced under Battistelli. It is said salaries for new employees in particular have been significantly reduced.

Unions see recruitment problems

EPO insiders fear that plans for salaries and pensions could aggravate recruitment problems with patent examiners in the long term. The New Employment Framework introduced in March 2018 has already caused discontent among staff representatives.

Under this framework, new employees initially receive contracts limited to five years, which can be extended for a further five years. But there is also an option to convert it into a permanent contract. At the same time, employees at the EPO only receive pension entitlements after ten years of employment.

But it is not just staff representatives that are concerned. The EPO’s customers fear the changes would make the EPO less attractive for potential job applicants. “The level of applications is already decreasing,” an insider told JUVE Patent. Since the introduction of the new employment scheme, say some EPO experts, national patent offices have become much more attractive to potential applicants than the EPO.

According to Munich patent attorneys, the German Patent and Trade Mark Office (DPMA) offers its examiners permanent employment contracts. “This will lead to problems for junior staff in the long term,” says the insider.

Nothing definitive

At the GRUR conference, members of the patent community criticised the initial effects of the new employment policy. “One weak point is obviously the lack of experienced examiners who write quick decisions that are difficult to understand,” said one participant during a discussion on the new EPO strategic plan. Another criticised the lack of technical expertise of some examiners.

Despite continuing efforts to improve social dialogue, there is still scepticism about the future EPO strategy. But nothing has been decided yet. All stakeholders must discuss the measures by mid-2020.

In June 2020, Campinos intends to present a package of potential measures to the Administrative Council. The earliest the measures will be implemented is 2021.