When renowned hedge fund manager Kyle Bass announced in January that he would challenge the validity of several pharmaceutical patents by using the post-grant proceedings created by Congress under the America Invents Act, the pharmaceutical industry cried foul. Bass, it said, was exploiting the system in a manner never intended: for his personal financial gain.
Now in response, the pharmaceutical, life sciences and biotech industries are using Bass’ actions to redirect the focus of Congress’ current patent reform debate to make it less about patent trolls and more about those post-grant proceedings, which have been used with success to invalidate weak patents at the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB) for almost three years.
At a hearing earlier this month before the Senate Judiciary Committee, the deputy general counsel for a pharmaceutical company told the lawmakers his industry would support a patent reform bill as long as they add provisions that address issues concerning inter partes review and other post-grant proceedings at the PTAB.
“Wall Street hedge funds have begun to exploit the IPR process as an investment strategy,” said Henry Hadad, Bristol-Myers Squibb Co.’s senior vice president and deputy general counsel, noting that hedge funds that file IPRs are more interested in the effect their petitions have on the value of a patent owner’s stock than in the outcome of a PTAB review of the patent claims.
Whether that is entirely true is difficult to say. Bass’ Coalition for Affordable Drugs, the group he formed to challenge drug patents at the PTAB, has filed 12 IPR challenges against nine different drugs since February. But not all have resulted in a drop in stock price.
The day after the coalition filed its first IPR petition, which challenged a drug patent used in the treatment of multiple sclerosis that is owned by Acorda Therapeutics, the value of Acorda’s stock dropped 7.6 percent. Later that month, the coalition filed a challenge to another patent on the same drug, and the stock fell 1.5 percent, according to an analysis by Kenyon & Kenyon partner Maria Luisa Palmese.Then in early April, the stock price of Shire PLC dropped 5.2 percent the day after the coalition challenged two Shire-held patents on two separate drugs.
But declines are not guaranteed. Celgene Corp., Pharmacyclics Inc. and Biogen Idec International all saw their stock prices rise the day after their respective patents were challenged by the coalition at the PTAB, according to Palmese’s analysis. If, as the drug companies have alleged, Bass was attempting to earn a profit by shorting the stock just before filing the IPR petitions, he failed in at least some of his attempts.
It is not clear, of course, what Bass’ investment strategy is. Nor is it known what impact the IPRs will ultimately have on the patent owners. The PTAB has not yet instituted the requested reviews, let alone decided on the validity of the various patents.
In addition, no one knows whether Bass, who runs Dallas-based Hayman Capital Management and rose to fame in 2007 after betting on a collapse in the U.S. housing market, brought his challenges to the PTAB solely to make money. He has said that he is doing this to stop drug companies from abusing the patent system through “evergreening,” or prolonging their monopolies on their key drugs by filing or sustaining their patents.
“A small minority of drug companies are abusing the patent system to sustain invalid patents that contain no meaningful innovations but serve to maintain their own anti-competitive, high-price monopoly, harming Americans suffering from illnesses,” he said in a statement in April after he filed the IPR petitions challenging the two Shire drugs.
The pharmaceutical industry and other patent holders aren’t buying it. And seeing an opportunity to bring attention to what they allege is an abuse of the IPR system, they are pushing lawmakers to make major changes that could dramatically reduce the impact the PTAB is having in the patent world.
Many, for example, support the STRONG Act, a patent reform bill introduced by Sens. Chris Coons, D-Delaware, Dick Durbin, D-Illinois, and Mazie Hirono, D-Hawaii. Under that bill, only parties who have been sued or charged with infringement would be allowed to challenge patents at the PTO. This, they point out, would make it impossible for third parties such as Bass to file IPR petitions and challenge patent claims. But it would also prohibit other third parties, such as public interest group the Electronic Frontier Foundation (EFF), from doing so. EFF is the group that used IPR proceedings to successfully challenge the validity of the so-called podcasting patent, which is a patent asserted by a nonpracticing entity against individual podcasters who could not afford the high cost of a district court patent battle and would therefore be likely to settle by paying a licensing fee.
“The changes Sen. Coons proposes would gut the ability of non-profit organizations like EFF to protect the community when the community is unable to protect itself,” EFF staff attorney Vera Ranieri wrote in a blog post on the EFF website, https://www.eff.org/deeplinks/2015/04/congress-stop-trying-limit-effs-ability-challenge-patents.
The bill also would make the relatively reasonably priced IPR proceedings at the PTO more expensive by requiring challengers to pay for costly discovery. But this runs counter to Congress’ intent when it created post-grant proceedings in the AIA, some lawyers say. “Congress’ goal was to make sure post-grant review proceedings would move quickly and efficiently and be less expensive than district court litigation,” said Michelle Carniaux, a partner at Kenyon & Kenyon.
But it doesn’t end there. Opponents to the most recent patent reform bill to be introduced in the Senate, dubbed the PATENT Act, are asking that even more changes to IPR proceedings be written into the legislation. They want the standard for interpreting patent claims in IPRs to match the narrow standard used in district court. Currently, the PTAB standard of review is the “broadest reasonable interpretation.” In February, the U.S. Court of Appeals for the Federal Circuit upheld the PTAB’s use of the broadest reasonable interpretation standard in IPRs.
Some lawmakers are already trying to squelch attempts to rewrite the rules for IPRs. At the hearing earlier this month, Sen. Chuck Schumer, D-New York, indicated that he would be concerned about attempts to water down post-grant proceedings in any patent reform legislation. And the high-tech industry, which has made good use of the PTAB to upend patent trolls, is also likely to fight against a change in the standard of review.
But the pharmaceutical industry’s move to conflate patent reform that was intended to address problems posed by patent trolls with activities by hedge fund managers such as Bass has complicated the fight for supporters of reform. At the hearing, Cisco senior vice president and general counsel Mark Chandler cited PTAB statistics that countered the view that the administrative court is a patent killer. He noted that there are 2.48 million outstanding and enforced patents in the United States and there have been 3,000 petitions for IPR review. “The PTO has granted about 1,300 of those 3,000, and that’s resulted in 391 patents having some or all of their claims eliminated,” he said.
Chandler also addressed the issue of hedge fund managers attacking patents to short the company stock, which he said was “not acceptable.” But he said it is an entirely different matter that does not belong in any patent reform legislation. “We ought to address those [attacks] directly through securities laws,” he said.
That could happen, but those who are unhappy with the way in which the PTAB has upset the status quo in patent litigation are seizing on Bass’ moves, urging Congress to consider PTAB reforms as it discusses patent reform.
At the forefront of that push will be pharmaceutical companies, which are starting to see more IPR petitions directed at them, said Brian Nolan, a partner at Mayer Brown.
“This has become an unexpected twist,” Nolan said. “And it looks like it’s going to become a sticking point in the patent reform debate.”
Reprinted with permission from the May 20, 2015 edition of Corporate Counsel © 2015 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.