Trolls without Boundaries – IPR, A Newfound Application AIA Did Not Anticipate?
By Grace Pan
Posted: 25th January 2016 09:14
A new, savage breed of patent troll has pioneered a novel stratagem to prey on the pharmaceutical industry. Under the auspice of reducing the cost of prescription drugs for the public and fostering healthier competition and innovation, the pharmaceutical industry, once thought to be immune from patent trolls, is now under siege by the very procedure that was designed to streamline patent litigation. The trolls leveraged the Leahy-Smith America Invents Act (“AIA”) and exploited Inter Partes Review (“IPR”) by threatening to invalidate patents without ever having to file an ANDA (“Abbreviated New Drug Application”) or having a generic product to launch. Ironically, IPR was originally created to strike a balance between monopoly (promoting innovation) and public interest (expeditiously dedicating science to public when appropriate). Using IPR as a tool to extort quick settlements from the pharmaceutical industries, however, was never in the cards.Birth of Patent Trolls
A patent troll, also known as a non-practice entity (“NPE”), is a company that generally does not make, use, or sell the invention claimed and disclosed in the patent(s) it is asserting. Traditionally, the NPEs more often than not are shell corporations set up specifically to own/hold patents, their sole purpose being to assert patent rights against potential infringers in exchange for a favorable, sometimes quick settlement in order to recover the fees the NPEs paid or invested to purchase the patent(s). Typically, such settlements exceed the purchase price of the patent(s). As time goes on, and the global economy collapses, major corporations began to join the ranks of NPEs by looking into their patent portfolios, dusting off patent(s) they are not practicing but are still maintaining, and taking steps to try to make them profitable by licensing them, which oftentimes involve initially “asserting” them against a potential infringer. Thus, patent trolls earn the new name: Non-Practice Entity.
As the patent trolls evolve from the traditional classic trolls to NPEs to the more savvy and sophisticated Patent attorneys, a new breed of NPE—have surfaced. These NPEs are no longer business people, but rather well-seasoned litigators who are versed in the IP arena and familiar with the ins and outs of patents and case laws. While Congress has made every effort to trounce these NPEs, they are only growing more resilient and, instead of fading into the sunset, it flourished.
Patent Trolls & The Advent of IPR
For many years, a company faced with a patent-infringement lawsuit brought by a patent troll or a NPE had only one form of costly, time-consuming recourse: invalidating the troll’s patent through the federal courts.
This changed on 16 September 2011, when President Obama signed into law the America Invents Act (“AIA”), the statute that instituted Inter Partes Review (IPR).
In accordance with AIA, a petitioner may only bring an IPR challenge in the first instance under sect 102 or 103, and only on the basis of prior art consisting of patents or printed publications. The law allows companies to fight patent trolls quickly and relatively cost effectively, because the Patent Trial and Appeal Board (“PTAB” or the “Board”) uses a lower evidentiary standard (preponderance of the evidence rather than a clear and convincing standard as in District Courts) and claim construction—broadest reasonable interpretation (“BRI”)—to determine whether each patent should be invalidated. At first blush, IPR seemed to be an effective weapon in the fight against patent trolls. In approximately three years, more than 77% of patent claims challenged via IPR were invalidated upon further review.
However, patent trolls draw strength from the AIA’s lack of a standing requirement to bring an IPR challenge. Specifically, AIA states that “[a] person who is not the owner of a patent may file a petition to institute an inter partes review of the patent.”Therefore, the party challenging the patent need not have been charged with infringement, or even establish any interest in practicing the claimed subject matter before initiating an IPR proceeding.
KYLE BASS AND THE COALITION FOR AFFORDABLE DRUGS (“CAD”)
The most infamous reverse patent troll is the Coalition for Affordable Drugs (“CAD”), an entity backed by hedge fund billionaire J. Kyle Bass, the head of Hayman Capital Management LP.
Approximately three years ago, Bass partnered with IP consultant Erich Spangenberg, a self-proclaimed “very proud” patent troll who made his name acquiring technology patents and using them to sue Apple and Exxon for patent infringement. Spangenberg’s firm, nXn Partners, is a paid consultant to Hayman Capital. Spangenberg and Bass exploit the IPR process through a three-step process: (1) Spangenberg identifies a drug patent; (2) Bass’ investment fund shorts the stock (bets against the shares) in the company who owns the patent, and invests in companies that would benefit from the patent’s demise; and (3) CAD files an IPR against the patent. Because Bass is a hedge fund manager rather than a pharmaceutical company seeking to compete, he cannot be sued for patent infringement.
CAD has filed roughly three dozen IPR challenges with a stated goal of invalidating weak patents to clear the way for lower-priced generic versions. Bass’s self-proclaimed “Robin Hood motive” is that these patents merely drive up prescription drug prices, and by invalidating spurious patents that tax the American economy and public welfare, CAD fosters healthy competition in the drug market. But scholars have pointed out that even if Bass were successful in invalidating the patents he challenges, other patents would still prevent generic drug manufacturers from entering the market for many of the drugs being targeted.
CAD filed its first IPR petition in February 2015, against Acorda Therapeutics’ patents on Ampyra®, a multiple sclerosis medicine In the petition, Bass claimed that Acorda’s patent merely jumbles together what scientists already knew about Amypra’s effectiveness and the proper dosing of the re-engineered molecule. The challenge caused the company’s stock price to drop almost 10%. Two months later, Bass targeted a Jazz Pharmaceuticals PLC patent for Xyrem®, a narcolepsy drug.
In April and May 2015, CAD filed IPRs directed to a handful of patents owned by pharmaceutical giant Celgene. The patents claim and disclose methods of distributing drugs that treat a form of white blood cell cancer, as well as an anaemia drug, both of which are harmful to fetuses. The patents include a system for identifying and counseling patients who may become pregnant and authorizing delivery of the drug only to non-pregnant women. In CAD’s petition, Bass claimed that such a system would have been obvious to one skilled in the art at the time the patent application was filed in light of several medical journal articles.
In response, Celgene asked the PTAB to sanction CAD and dismiss Bass’ IPR petitions. Celgene contended that Bass is using IPR as a perverse investment strategy, which is contrary to the AIA’s anti-patent troll purpose. To buttress this argument, Celgene pointed to the AIA’s legislative history, which evidences Congressional intent that the AIA preclude “non-practicing entities” that do not produce any product and exist only to bring patent cases from practicing abusive litigation. Celgene also noted that the AIA did not contemplate Bass’ use of IPR to cause changes in the stock prices of public companies for financial profit.
In CAD’s opposition to Celgene’s motion for sanctions, it parroted back portions of the AIA’s statutory language, arguing that whether CAD’s motivation is to benefit Bass’ hedge fund is of no moment, and that in any event, the Supreme Court supports “economically motivated actors” in challenging patents. CAD reiterated that its petitions serve the public interest by reducing future litigation costs for generic pharmaceutical companies and furthering Congress’ goal of eliminating low quality patents. Next, CAD argued that the First Amendment and the Noerr-Pennington Doctrine, which allows citizens to petition the government to redress grievances, protect CAD’s right to bring IPR petitions because Celgene failed to establish that CAD’s petitions were objectively baseless or brought with the specific intent to further wrongful conduct. CAD concluded by relying on the specific language of 35 U.S.C. § 316 to argue that the PTAB can only use dismissal as a sanction after an IPR has been instituted.
On 25 September 2015, the PTAB declined to sanction Bass. The Board decided that an economic motive is not an abuse of process: “Profit is at the heart of nearly every patent and nearly every inter partes review…[w]e take no position on the merits of short-selling as an investment strategy other than it is legal, and regulated. Invigorated by the decision, Spangenberg subsequently encouraged volunteers to target the patent for Depomed Inc.’s painkiller Nucynta®, purporting that the Board’s decision not to sanction Bass indicates that anyone can fight drug patents. Spangenberg posted on his blog a 63-page draft IPR petition for Nucynta®, hoping to crowdsource suggestions to make the challenge stronger.
Ultimately, however, the PTAB has declined to institute most of Bass’ IPR petitions. It declined to institute both Ampyra® IPRs, reasoning that Bass failed to demonstrate that the posters he cited were sufficiently publicly accessible to qualify as printed publications, and thus prior art. Because PTAB’s decision was narrow, focusing mainly on the merits of the petition rather than CAD’s status as petitioner, it did not do much in the way of setting helpful precedent for those battling IPR trolls. Approximately one month ago, the Board declined to conduct an IPR review of a patent on Horizon Pharma PLC’s arthritis medication Vimovo®, for which CAD petitioned in June 2015. CAD had argued that Vimovo®, which is sold at nearly $26.50 per tablet, is a combination of naproxen and esomeprazole magnesium, both of which are over the counter drugs (sold as Aleve and Nexium, respectively) that can be purchased without a prescription, for less than $1.00.
Legislative Reform: The Innovation Act and Patent Act
Congress is currently considering legislation—the Innovation Act—that amends the AIA by specifically barring hedge funds from filing IPRs. The bill prohibits the filing of an IPR unless the petitioning entity certifies that it: (1) does not own and will not acquire, for a specified period after the certification, a financial instrument (such as an equity swap, collar, or exchange fund) to hedge or offset any decrease in the market value of an equity security of the patent owner or its affiliates; and (2) has not demanded payment in exchange for a commitment not to file an IPR petition, unless it is sued for or charged with infringement. The Innovation Act was passed by the House in December 2013, but died in the Senate six months later. In February 2015, the bill was reintroduced to the House. Bass took swift action, issuing an April 2015 Statement to the House Committee on the Judiciary (“Committee”) regarding the Innovation Act, in which he reminded Congress that it “serves everyone’s purposes to not be seen to be looking too much at who is bringing” an IPR.” The Act was most recently reported as amended by the Committee on 29 July 2015.
The Senate considered an amendment to a similar reform bill, called the PATENT Act, which would include what some have identified as a “placeholder” to protect life sciences companies from IPR abuse. The law would make it impossible to file an IPR against pharmaceutical patents or patents that cover biologics that have been approved by the FDA. As of yet, neither the PATENT Act nor the amendment has been adopted.
Defensive and Offensive Strategies to Protect Pharma Clients’ Patents from IPR Trolls
Defending a pharmaceutical patent in an IPR proceeding can be exorbitant, costing patent owners between $700,000 to over $1 million, due in part to the need to cast a wide net for relevant prior art. To avoid such costs, encourage your clients to determine whether they are vulnerable to prior art challenges, and consider raising the issues themselves in a Supplemental Examination proceeding, where they will have a more realistic opportunity to amend claims, a more liberal ability to present evidence, and can discuss their position with the examiner without an opposing party’s involvement. Once the USPTO is considering (or has considered) the most relevant prior art in such a proceeding, the patent holder could urge denial of any IPR petitions based on 35 USC § 315(d) by citing 35 USC § 325(d), which permits the PTAB to deny petitions where “the same or substantially the same prior art or arguments previously were presented to the Office.”
Alternatively, some suggest that biopharma products be exempt from IPR eligibility because the generic drug law and other mechanisms have long provided effective methods of patent challenge. Last, perhaps Bass-targeted companies should be able to bring a federal cause of action for damages, such that liability attaches whenever the filer of an IPR knowingly and willingly acts in a manner contrary to the PTO’s disciplinary rule. This rule, 37 CFR § 11.18, is modeled on Federal Rule 11, and requires that an IPR petition “is not being presented for any improper purpose, such as to harass someone or to cause unnecessary delay or needless increase in the cost of any proceeding before the Office.”
Grace L. Pan, a partner at Holland & Knight, is an intellectual property counselor and litigator who is admitted to practice before the U.S. Patent and Trademark Office and the State Bars of New York, New Jersey, and the District of Columbia. She is also admitted as a Gaikokuho Jimu Bengoshi, a registered foreign lawyer, in Japan, is a member of the Daini Bengoshi Kai, the Tokyo Bar Association and is admitted to practice in Taiwan as a registered foreign lawyer.
In April and May 2015, CAD filed IPRs directed to a handful of patents owned by pharmaceutical giant Celgene. The patents claim and disclose methods of distributing drugs that treat a form of white blood cell cancer, as well as an anaemia drug, both of which are harmful to fetuses. The patents include a system for identifying and counseling patients who may become pregnant and authorizing delivery of the drug only to non-pregnant women. In CAD’s petition, Bass claimed that such a system would have been obvious to one skilled in the art at the time the patent application was filed in light of several medical journal articles.
In response, Celgene asked the PTAB to sanction CAD and dismiss Bass’ IPR petitions. Celgene contended that Bass is using IPR as a perverse investment strategy, which is contrary to the AIA’s anti-patent troll purpose. To buttress this argument, Celgene pointed to the AIA’s legislative history, which evidences Congressional intent that the AIA preclude “non-practicing entities” that do not produce any product and exist only to bring patent cases from practicing abusive litigation. Celgene also noted that the AIA did not contemplate Bass’ use of IPR to cause changes in the stock prices of public companies for financial profit.
In CAD’s opposition to Celgene’s motion for sanctions, it parroted back portions of the AIA’s statutory language, arguing that whether CAD’s motivation is to benefit Bass’ hedge fund is of no moment, and that in any event, the Supreme Court supports “economically motivated actors” in challenging patents. CAD reiterated that its petitions serve the public interest by reducing future litigation costs for generic pharmaceutical companies and furthering Congress’ goal of eliminating low quality patents. Next, CAD argued that the First Amendment and the Noerr-Pennington Doctrine, which allows citizens to petition the government to redress grievances, protect CAD’s right to bring IPR petitions because Celgene failed to establish that CAD’s petitions were objectively baseless or brought with the specific intent to further wrongful conduct. CAD concluded by relying on the specific language of 35 U.S.C. § 316 to argue that the PTAB can only use dismissal as a sanction after an IPR has been instituted.
On 25 September 2015, the PTAB declined to sanction Bass. The Board decided that an economic motive is not an abuse of process: “Profit is at the heart of nearly every patent and nearly every inter partes review…[w]e take no position on the merits of short-selling as an investment strategy other than it is legal, and regulated. Invigorated by the decision, Spangenberg subsequently encouraged volunteers to target the patent for Depomed Inc.’s painkiller Nucynta®, purporting that the Board’s decision not to sanction Bass indicates that anyone can fight drug patents. Spangenberg posted on his blog a 63-page draft IPR petition for Nucynta®, hoping to crowdsource suggestions to make the challenge stronger.
Ultimately, however, the PTAB has declined to institute most of Bass’ IPR petitions. It declined to institute both Ampyra® IPRs, reasoning that Bass failed to demonstrate that the posters he cited were sufficiently publicly accessible to qualify as printed publications, and thus prior art. Because PTAB’s decision was narrow, focusing mainly on the merits of the petition rather than CAD’s status as petitioner, it did not do much in the way of setting helpful precedent for those battling IPR trolls. Approximately one month ago, the Board declined to conduct an IPR review of a patent on Horizon Pharma PLC’s arthritis medication Vimovo®, for which CAD petitioned in June 2015. CAD had argued that Vimovo®, which is sold at nearly $26.50 per tablet, is a combination of naproxen and esomeprazole magnesium, both of which are over the counter drugs (sold as Aleve and Nexium, respectively) that can be purchased without a prescription, for less than $1.00.
Legislative Reform: The Innovation Act and Patent Act
Congress is currently considering legislation—the Innovation Act—that amends the AIA by specifically barring hedge funds from filing IPRs. The bill prohibits the filing of an IPR unless the petitioning entity certifies that it: (1) does not own and will not acquire, for a specified period after the certification, a financial instrument (such as an equity swap, collar, or exchange fund) to hedge or offset any decrease in the market value of an equity security of the patent owner or its affiliates; and (2) has not demanded payment in exchange for a commitment not to file an IPR petition, unless it is sued for or charged with infringement. The Innovation Act was passed by the House in December 2013, but died in the Senate six months later. In February 2015, the bill was reintroduced to the House. Bass took swift action, issuing an April 2015 Statement to the House Committee on the Judiciary (“Committee”) regarding the Innovation Act, in which he reminded Congress that it “serves everyone’s purposes to not be seen to be looking too much at who is bringing” an IPR.” The Act was most recently reported as amended by the Committee on 29 July 2015.
The Senate considered an amendment to a similar reform bill, called the PATENT Act, which would include what some have identified as a “placeholder” to protect life sciences companies from IPR abuse. The law would make it impossible to file an IPR against pharmaceutical patents or patents that cover biologics that have been approved by the FDA. As of yet, neither the PATENT Act nor the amendment has been adopted.
Defensive and Offensive Strategies to Protect Pharma Clients’ Patents from IPR Trolls
Defending a pharmaceutical patent in an IPR proceeding can be exorbitant, costing patent owners between $700,000 to over $1 million, due in part to the need to cast a wide net for relevant prior art. To avoid such costs, encourage your clients to determine whether they are vulnerable to prior art challenges, and consider raising the issues themselves in a Supplemental Examination proceeding, where they will have a more realistic opportunity to amend claims, a more liberal ability to present evidence, and can discuss their position with the examiner without an opposing party’s involvement. Once the USPTO is considering (or has considered) the most relevant prior art in such a proceeding, the patent holder could urge denial of any IPR petitions based on 35 USC § 315(d) by citing 35 USC § 325(d), which permits the PTAB to deny petitions where “the same or substantially the same prior art or arguments previously were presented to the Office.”
Alternatively, some suggest that biopharma products be exempt from IPR eligibility because the generic drug law and other mechanisms have long provided effective methods of patent challenge. Last, perhaps Bass-targeted companies should be able to bring a federal cause of action for damages, such that liability attaches whenever the filer of an IPR knowingly and willingly acts in a manner contrary to the PTO’s disciplinary rule. This rule, 37 CFR § 11.18, is modeled on Federal Rule 11, and requires that an IPR petition “is not being presented for any improper purpose, such as to harass someone or to cause unnecessary delay or needless increase in the cost of any proceeding before the Office.”
Grace L. Pan, a partner at Holland & Knight, is an intellectual property counselor and litigator who is admitted to practice before the U.S. Patent and Trademark Office and the State Bars of New York, New Jersey, and the District of Columbia. She is also admitted as a Gaikokuho Jimu Bengoshi, a registered foreign lawyer, in Japan, is a member of the Daini Bengoshi Kai, the Tokyo Bar Association and is admitted to practice in Taiwan as a registered foreign lawyer.
Grace practices on matters before the U.S. Patent and Trademark Office and matters involving federal patent, federal copyright and federal trademark; she represents clients from the United States, Japan, Taiwan and China in the aforementioned areas of law. In addition, Grace is experienced in enforcing and defending patents, trademarks, trade dress before ITC and various District Courts within United States as well as the Courts of Appeals for the Federal Circuit in biotechnology, medical, organic chemistry, electronic, semiconductor, mechanical and related technical fields.
Grace can be contacted on 212.513.3447 or by email at grace.pan@hklaw.com
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