25 March 2015
The America Invents Act of 2011 (AIA) created procedural vehicles for new market participants, such as investment firms, to challenge patents. These procedural vehicles include inter partes review (“IPR”) and post-grant review (“PGR”). Recent use of these procedures by companies in the investment community has caused some in the biotech sector to sound the alarm in Congress that new legislation is required to control parties that may bring such challenges. The speed at which companies in the biotech sector ran to Congress seeking the means to prevent market participants from challenging patents highlights the risk that these procedures present.
Unlike an attack in a district court, both IPR and PGR allow any party to challenge the validity of a patent. The only barrier to an investment firm’s use of such proceedings is the cost of drafting the papers and paying the fees of the US Patent and Trademark Office (Patent Office). Although these costs are not inconsequential, they pale in comparison to the potential effect a filing may have on the value of an investment.
The effect such filings may have on a company is evidenced by a filing made by the Coalition for Affordable Drugs, an entity related to Kyle Bass, founder and principal of Hayman Capital Management, L.P. On February 10, 2015, the Bass entity filed an IPR challenging the validity of one of five patents owned by Acorda Therapeutics that covered its Amprya drug franchise. On that date, Acorda’s stock price dropped 10 percent, resulting in a loss of more than $150 million in the valuation of the company. Further demonstrating the power of an IPR filing against a biotech company that is highly dependent on a single product line and the patents that cover that product line, the Bass entity filed a second IPR on another Acorda patent on February 27, 2015. This action was followed by another 5 percent drop in the company’s stock price. Acorda has not recovered from these drops and still trades down 15 percent from its pre-filing levels. Those holding a short position on this stock undoubtedly welcomed the 15 percent drop, while those holding a long position may have been blindsided by these events.
Although the AIA does not prohibit investment firms from utilizing post-grant proceedings in this manner, federal prosecutors and securities regulators have brought securities fraud cases against short sellers in other contexts when they have discovered clear evidence linking short sales to the purposeful dissemination of false statements to depress a stock’s price. In light of the potential risk of a criminal or civil enforcement investigation, an investment firm seeking to pursue IPR or PGR against a company that it is shorting should document its grounds for asserting patent invalidity. By doing so, investment firms may pursue this strategy while minimizing the risk of subsequent criminal and regulatory exposure.
Given the effect a Patent Office challenge can have on certain companies’ valuations, the investment community should consider what impact a challenge may have on its positions. An investment firm holding a short position may seek to utilize these proceedings to realize value in that position. In this instance, the investment firm should not only ensure that it has reasonable grounds for its challenge, but that it has documented those grounds. On the other hand, investment firms looking to take a long position in a biotech company must realize that due diligence with respect to the patent holdings will be more important now that market participants other than traditional competitors may challenge a patent.