Traveling back from an interesting and lively VPP meeting on a train at dawn through beautiful, lonesome parts of Germany, full of large forests hosting mythical creatures that made it into the fairy tales of the Grimm Brothers, I felt somehow elated. So let me use this momentum to refresh our spirits by debunking three popular myths.

1. Bielefeld exists

I can now positively and finally testify that Bielefeld exists. Doubts about its existence have been spread for many years and even made it to Wikipedia, where reference is made, among others, to none less than Chancellor Frau Merkel. Be that as it may, I have now been to Bielefeld and have seen it with my own eyes. What a joy!

Bielefeld is actually surprisingly large, having about 340,000 inhabitants of whom I happen to know about three. It is also fairly old – founded around 1240 to secure the famous Bielefelder pass (altitude 120 m) within the equally famous Teutoburg Forest – and pretty lively. Admittedly, not everything there is pretty, but the conspicuous ugliness of many buildings of this city may at least serve as a useful reminder that it is (a) a damned stupid idea to allow an authoritarian movement to usurp power in a democracy and to start a war and (b) it pays to invest in good architecture. I should also caution innocent visitors about one of its local mineral waters, which contains no less than 950 mg/l sulfate and 421 mg/l calcium – i.e. almost 1.4 grams of gypsum per liter. And believe me, you can taste that!

Other than that, Bielefeld is well-known for its innovations in the food sector. Just take the following delicious dessert as an example

Which was designated in our (German) menu as

With this, I hereby declare the myth/conspiracy that Bielefeld does not exist as debunked. It is an enjoyable city and, as I have shown above, at least some of its citizens have a good sense of humor.

2. The EPO is not poor

A similar myth that seems to pervade through the heads of the EPO management every other year is that the EPO’s finances are not in good shape and that, as the current Office President put it, “we might face a gap”.

We might indeed, who can deny that? But the relevant questions are (i) when and (ii) under which circumstances/assumptions?

The answers are (i) in 20 years, and (ii) the underlying assumptions are subject to significant controversy, to put it mildly. To put them into context, I would just like to offer three observations. Firstly, the current (2019) financial study was considered necessary, because the predictions of the last one (2016) did apparently not sufficiently match reality. As stated in the study on page 9 (sic!):

“… some events could not fully be anticipated in 2016: a low interest rate environment persists, and the production and productivity of the Patent Granting Process have evolved faster than anticipated. Additionally, annual benefit payments will be higher than contributions to RFPSS sooner than expected.”

Secondly, the study itself acknowledges that

Forecasting a 20-year development of the EPO’s financial position is inevitably a very uncertain exercise, as these positions will be impacted by factors which cannot be predicted with certainty. Therefore, four scenarios were developed…

Thirdly, I have read the 2018 success report of the Battistelli administration and am slightly confused, because this report states the following:

The measures taken by the Office to increase productivity and available capacity generated an additional 30% in income from procedural fees between 2010 and 2017. As a result of higher performance, the standardised operating result of the Office grew from EUR +70 million in 2010 to EUR +394 million euros in 2017. Standardised employee benefits – which have generated great liabilities for the office in the past – have been brought under control. In 2010 those expenses represented almost 80% of the total revenue but have been reduced to around 66% presently. High cash surpluses have been generated in the 2010-17 period (EUR +2.4 billion) and the EPO is now in a stronger overall financial position both in its ability to finance future liabilities and in its treasury.

So everything was in order and “brought under control” in 2018 (so that the past President earned his extra bonus (???)), but only one year later a new study is presented wherein doubts regarding sustainability in 20 years are expressed. (Can one claim the bonus back?)

With this, let us turn back to reality. According to the EPO’s most recent figures (page 9 of this PDFinance_Presentation), the Standardised Operating result in 2017 was a surplus of €366 million. In the year 2018 it was €390 million, a plus of about 6% (don’t ask me why these figures are slightly different from the ones published in the Battistelli report). The productivity of the examiners (Products per Examiner) has likewise increased from 95.5 (2017) to 99.8 (2018) products per headcount. Thus, it indeed seems that the EPO has become more effective (as it was planned by the Battistelli management – note that I am not talking about quality here) and made an operating profit that I would describe as pretty breathtaking.

On top of that, the EPO Treasury Investment Fund (EPOTIF) which was established and activated in 2018 under external asset management control has assets of €2,4 billion, that is 2.400.000.000 EUR. If my understanding is correct, most of this money has been invested on the stock market in shares and bonds. Whether this is right or wrong may be a matter of debate, but the net effect of this policy in the year 2019 was clearly positive: Namely, whereas general interest rates were about zero, both stocks and bonds had a pretty good year and (so far) increased by about 8% from 1 January. Which adds another approximately 200 million EUR to EPOTIF’s asset sheets. Sounds great – but is this sustainable?

I have argued before that I do not perceive it as the core objective of a patent office to make huge profits. In the end, a patent office is to serve the common good, i.e. promoting technological progress by thoroughly examining patent applications and granting patents to those inventions that deserve it. In contrast, it is not a patent office’s task to impose additional liabilities on applicants in the form of fees, just to put the excess earned by these fees on the stock or bond market. It goes without saying that the European Patent Office should be self-financing and receive the money it needs for operating its business and paying the agreed staff pensions to its retired employees, and I have no doubt that the Administrative Council will provide the office with those means by allowing it to raise the necessary fees at any time. (Whether the EPO needs much more than that, e.g. to pay its past President an appreciable extra premium in addition to his generous salary or to sponsor lavish inventor of the year ceremonies, is another matter on which I have commented earlier.)

In any case, I would summarize that it is a pure myth that EPO is “poor” and that active measures would therefore be necessary to cut costs, particularly staff costs and pensions. On the contrary, staff has demonstrably become more effective, so if anything, I would argue that they have rather deserved a reward.

On this basis, it is quite difficult to see a gap anywhere in the EPO’s figures which would justify immediate action. Predictions about the long-term future are notoriously difficult and highly dependent on the assumptions underlying them, which therefore need to be thoroughly scrutinized and discussed. If my understanding is correct, most of the scenarios under which a “gap” has been prognosed seem to assume a global economic recession and slump in the stock market (“decline in equity earnings”) within the next few years, followed by a slow increase. There is also an optimistic scenario under which there would be no predicted gap at all. All of this may or may not happen, I don’t know. With my limited economic understanding, I just wonder one thing: If EPO management seriously believes in any of the more gloomy-gap predictions and thinks it is appropriate to invest a large proportion of both its investment fund and its pension fund on the stock market, would it not be wise to shorten the stocks now, thus generating a buffer, and re-invest after the slump?

In any case, I am confident that the construction of the EPO will continue to allow it to reliably generate the income it (really) needs in any given year. This is even enshrined in Article 40(1) of the EPC:

The amounts of fees … shall be at such a level as to ensure that the revenue in respect thereof is sufficient for the budget of the Organisation to be balanced.

Nonetheless, I think it would be appropriate not to close one’s eyes to the general demographic trends in Europe and the level of salaries and pensions of employees at the national patent offices in Europe and world-wide. If the EPO’s (alleged) long-term funding gap is largely due to the prediction that pension payments will triple by 2038 under the current pension scheme, it is probably legitimate to first check the basis of this prediction and then evaluate whether the current pension scheme is sustainable in the long run, or whether something should be done about it, and if so, what. Both is probably pretty complex, and I lack the economic foundations and financial figures to express any insightful opinion at this moment.

With that, a final comment on quality, allegedly the EPO’s highest priority. How can a patent office secure high quality of its “products”? Two measures stand out, in my view: (a) recruit highly qualified staff and (b) enable, educate and motivate it to provide high quality work. Common sense tells you that it will be difficult recruiting highly qualified staff if you are not providing adequate pay (including pensions) and job security to begin with. Common sense may also tell you that it will be difficult motivating staff to provide high quality work if you suggest 17 measures for discussion to the Budget & Finance Committee and the Administrative Council of which 10 (and the ones designated as most effective) go at the expense of your staff. If anything, this may be expected to have a boomerang effect on motivation. The recent strikes (more are planned) and demonstrations organized by the EPO’s Staff Union therefore come to me as no surprise. There must be a better way to initiate and conduct such a discussion.

Can I perhaps offer a “social litmus test” in this regard? I would expect that any measures cutting into salary and/or pension increases would be much more acceptable if it is made transparent and credible that the same measures will proportionally (or better: over-proportionally) also be applied to top management. For example, why not think about capping the maximum salary and/or pension at a certain (reasonable) level?

3. There are Positive Developments in the IP World

A third myth that I would like to debunk here is that there are never any new and good developments in the EPO and the Federal Patent Court. Again, not true! There are at least two pieces of good news that I would like to spread here.

Firstly, I have heard that there have finally been some positive developments at the EPO in regard to amicably settling the disciplinary actions against several past board members of SUEPO. Some of these cases have apparently been finally settled; in others negotiations seem to be more seriously conducted than in the past years. Having asked for such amicable solutions for a while, I very much welcome this (overdue) development and hope that the successful conclusion of all cases will remove a considerable stumbling block that existed in the relations between EPO management and its staff.

Secondly, the German Ministry of Justice also deserves a round of applause, since it has finally approved the filling of several vacant positions of (technical) Judges at the Federal Patent Court. I have heard that legislative measures to accelerate German nullity proceedings are also under way. All in all, and combining this with the sudden end of the smartphone wars, I am now much more optimistic that the current backlog of the Federal Patent Court will gradually disappear over time.

So there is also positive news to report from time to time and it seems that common sense has not completely disappeared from this world. With that, happy Halloween, United Kingdom and all readers!


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6 comments

  1. Thank you Thorsten for highlighting what I believe is an area where increased public engagement and scrutiny are vital, namely the financial dealings of the EPO.

    Like you, I can make no sense of the predictions in the 2019 Financial Study. The EPO has HUGE cash reserves and has decided to play with a large portion of those reserves on the stock market. If the EPO is following models of good governance, then it will not be gambling with money that it cannot afford to lose. Thus, one can only conclude that the EPO currently has a significant cash pile that is effectively surplus to requirements.

    If the predictions in the Financial Study are to be believed, then one would expect the EPO to: (a) provide robust justifications for the assumptions upon which those predictions are based; (b) identify the causes of the predicted losses; (c) consider a range of options for dealing with the underlying causes; (d) provide robust justifications for the chosen solutions; (e) stop playing on the stock market; and (e) target investments with potentially smaller (but guaranteed) returns.

    It has been a while since I read the Financial Study, but my recollection is that it most certainly did not follow the logical approach set out above. Indeed, I recall that one of the most “interesting” predictions used in the Financial Study was an assumption of ZERO increases in EPO official fees for an astonishingly long period of time. Thus, given that the users of the European patent system pretty much expect to cope with regular fee increases, one wonders what the basis was for this rather unbelievable assumption.

    Of course, if one were a cynic, one might speculate that the authors of the Financial Study were instructed to identify a set of assumptions that might generate predictions of a potentially perilous financial situation in the long term. The question is, why would anyone provide instructions aimed at achieving a predetermined result?

    In situations like this, it is often helpful to ask a simple question: cui bono? Let us consider a number of possible candidates.

    EPO staff: it is pretty clear that the EPO’s (non-senior) staff will be the victims of the Financial Study, and not its benefactors. Indeed, it seems that the proposed “cost savings” are to be made entirely at the expense of those staff.

    Patent applicants: for this group, it is a mixed picture. On the one hand, they might benefit from a freeze in EPO official fees (though it remains to be seen whether the EPO follows through with such a strange policy). On the other hand, applicants will get much less “bang for their buck” in terms of QUALITY patent examination. That is, with the “production” of EPO examiners constantly being pushed (significantly) upwards, the amount of time that applicants can expect an examiner to dedicate to their case is constantly reducing. Whilst it is possible that a relatively small reduction in time per case can be achieved without a reduction in quality, it is frankly inconceivable that year-on-year cuts will not lead to a lowering of quality (especially in view of the cuts already implemented in recent years).

    Fund managers for EPOTIF: this group will undoubtedly be a benefactor of the EPO’s recent policies, and also (it seems) of policies devised in the light of the Financial Study, where “savings” made at the expense of EPO staff will be invested into EPOTIF. The funds invested in EPOTIF are truly enormous. Presumably, therefore, the (private sector) fund managers for EPOTIF will reap large rewards in terms of their fees for managing that fund.

    You will note that I have not considered whether EPO management (or AC delegates) are possible beneficiaries. This is because, upon the basis of publicly available information, it is impossible to determine one way or another whether they stand to either lose or gain from the rather strange policies that have been implemented. Nevertheless, I think that it is possible to make a pertinent observation. That is, the only reason that it is possible for the fund managers for EPOTIF to earn huge fees is that the policies implemented by the EPO’s management directed the creation of EPOTIF (as well as continued, significant investments into those funds). This observation may or may not be significant. However, when there are well reasoned doubts about the rationale for creating the fund in the first place (let alone the rationale for predicting a dire financial situation that requires more cash to be squirreled away into EPOTIF), it becomes painfully obvious that there are insufficient safeguards in place that might prevent (or even monitor for) key decision-makers at the EPO from receiving kick-backs from the beneficiaries of their largesse.

    I must stress that this is all hypothetical, and that I have abslutely no evidence whatsoever of any wrongdoing on the part of anyone involved in this whole scenario. However, the reason for pointing out the POSSIBILITIES for abuse is that it highlights what I believe could be a very serious failing of transparency and accountability in connection with the governance of the EPO.

  2. Dear Mr Bausch,
    many thanks for your well-written articles.
    Regarding your 3rd point, it might be time to put the DPMA under scrutiny, too. If the tales of my former colleagues there are correct, the judges at the BPatG are appointed in peculiar ways. In electrical engineering, they are always recruited from G01R examiners, even though there are almost no cases from this class. And if someone is intended to become a judge, he will get this IPC to examine… This has gone on for quite some time, so there is no judge left who has experience with, e.g., electrical machines or some of the other EE specialties…
    And in physics everyone knows who is slated to become one of the next judges. And it just pure coincidence that he is the son of a former H1-head and presidung judge…
    Maybe we see a general problem with patent offices…
    An EPO examiner
    PS keep up your great work!

  3. Well done VPP. Well done Thorsten Bausch. Well done Wikipedia. Well done Angela Merkel. Well done Bielefeld. And while we are about it, well done Henning Wehn.

    It is said in England that Germans have no sense of humour. One more sad sign of parochial ignorance on the island. This particular English reader is heartily fed up with English banter, what passes for English “humour”, and would much prefer the gentle but supremely effective wit of intelligent people like Axel Hacke or Dieter Nuhr. Readers, does anybody know: who are their media counterparts in England?

    https://en.wikipedia.org/wiki/Henning_Wehn

  4. It is again to put to the credit of Mr Bausch to put the finger in the wound at EPO. I do agree with him that the situation is by no way as bleak as some “managers” at the EPO want us to believe. There is a French say: if you want to kill your dog, just claim that it has rabies. That is what I feel when a read the new financial study.

    The situation at the EPO is slowly becoming farcical, not to say more. One president leaves and publishes a document full of self-praise. A new president comes and it seems that all what his predecessor did was not completely worthless but has to be taken with great caution, not to say with a barge pole.

    It started with the IT systems. After 6 months in place the new president found that the IT system put in place by its predecessor was worthless and had to be substantially reviewed. Was this correct or was it a mere pretext to bring into the EPO even more buddies from Alicante?

    Now it continues with the finances. Since Mrs Brimelow, all presidents have considered that the EPO is always broke, and that the situation can only get worse. I do not trust one sentence written in the new financial study, as the starting assumptions are beyond belief.

    It is certain that the EPO has no guarantee about renewal fees. But when according to the preceding president the number of grants has risen by 86% can it come as a surprise that the revenue from annual fees increases? That it is not possible to sustain such an increase over many years is also not surprising, unless the applications are rubber stamped into grants. But the EPO is not a new borne organisation. It opened in 1978, and the first patents were granted in the eighties. Was it not possible to derive from the revenues relating to national fees an expectation about the development of this type of revenue? The increase in applications entering the EPO has flattened somehow, so that it should be possible to derive some credible figures.

    The EPO is able to publish studies about the usefulness of the European patent system for SMEs, or on the wages in companies with a high proportion of IP, but is at a loss when it comes to its own finances and it needs external consultants? Stop pulling our leg. In IPkat the credibility of the EPO study on the effect of IP has been severely criticised. The same can be said about the present financial study. Any consultant hired will always find that there is room for “improvement” as it will never have to bear with the consequences of the “Improvement” he proposed.

    That people retire early, means simply that the most experienced people are fed up being ill-treated systematically. This is the result of the staff harassment started by the predecessor who was sooo successful. Taking this out on the people left, is simply a disgrace.

    By giving five year contracts, the EPO is not any longer an attractive employer. Who on earth will leave his home country to hire as a mercenary at the EPO with the chance of being fired after 5 or 10 years? Certainly not if you have a family. Those people passing by will not contribute to the pension fund.

    Here again it is the recruitment policy set up by some “managers” which leads to the problems the EPO might face with respect of pensions. But they will still have some benefits, albeit less than those having been recruited up to 2009. In 2009 the pension system has been changed, with less guarantees.

    But these experienced people were and are needed in order to train newcomers. Dealing with patents is a matter of experience and cannot be compared with dealing with potato chips or building a plane. The new recruitment policy will contribute to a lower performance of the pension system, as the number of contributors will diminish. That the increase in life expectancy may make some changes about the pension age necessary is not at stake. But only coming with gloom and doom is not what is expected from “managers” unless they have a hidden agenda.

    The new president was put in place by the AC in order to restore social peace. The atmosphere at the EPO has not improved one iota. The new president has not improved the situation. I would even claim that it is worse. It worse not only because the hopes put in the president have not materialised, but also from a clearly hostile stance, it has gone over to a more vicious way of management, letting people believe it will become better, but at the same time thinking of measures which go to the detriment of staff, and asking even more.

    It is sad to see the EPO to be run in the wall by pseudo “managers” who primarily see the EPO as a milking cow for themselves and their buddies, but who despise the people bringing in the money.

    Techrights: FINGERS OFF!!! Directly or indirectly! No need to be more specific.

  5. After 18 years of examining patents at the EPO I am forced to run away next June to try to avoid being hammered by the crazy and unnecessary 17 measures imposed by the new pres and gracefully explained to us by the stanlaurel & oliverhardy consultants of Mercier.
    But no worries, I will be replaced by a guy who graduated last year and had an online Ansera full&complete patent training during the last 9 months.
    Good luck everyone. I am out of here. And I am not the only one.

  6. Thanks for that last comment, 18. Your experience inside the EPO will enhance your employment prospects, I am sure. As to your successor, good luck to him or her. They will certainly be needing it.

    For management consultants have no iota of feeling for the esprit de corps or motivation of those they critique. The only thing that motivates them is to render their clients entirely dependent on them. One you (as their client) let them in, those management consultancy firms have got you hooked. They make it so that the withdrawal symptoms, of dispensing with their “services” at any time, are so awful as to be intolerable.

    To you they look like Laurel and Hardy. Of course. But to their burned former clients, they look more like vampire squids clamped on the face of humanity (as was once aid about one of them, by somebody who knows them very well).

    But do the owners of the EPO care? Surely not.

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