Last February, Hayman Capital Management hedge fund manager Kyle Bass, through his wholly owned subsidiary, the Coalition for Affordable Drugs, filed a patent review petition with the U.S. Patent and Trademark Office’s Patent Trial and Appeals Board (PTAB). Bass seeks to invalidate two of the five patents held by pharmaceutical maker Acorda Therapeutics on its drug Amprya, which helps some multiple sclerosis patients to walk.

Explaining his petition, Bass said:

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 anti-competitive, high-price monopoly to the detriment of Americans suffering from illness. The beautiful thing is this will lower drug prices for everyone.

Pharmaceutical and biotechnology companies were quick to disparage this altruistic rhetoric. Said James C. Greenwood, chief executive officer of the Biotechnology Industry Organization (BIO), a D.C.-based trade association representing biotech firms and related entities, “There’s nothing in this man’s history to suggest he has any interest in lowering health care costs.” Suspicions are that Bass is shorting Acordia (that is, betting that the stock price will fall as Acordia defends, and perhaps loses, its patents), or else he’s betting on competing drug companies whose market positions would improve if Acordia’s patents are revoked.

Amprya isn’t the only drug in Bass’s crosshairs. He subsequently filed petitions for biopharmaceutical maker Shire’s drugs Lialda (a medicine for ulcerative colitis) and Gattex (for short bowel syndrome), and Jazz Pharmaceuticals’ Xyrem (for narcolepsy). It’s expected that more petitions are forthcoming.

Review procedures / Bass’s moves have drug makers calling on federal lawmakers to tighten procedures for reviewing a patent’s validity that were adopted as part of the America Invents Act of 2011 (AIA). The current regime was implemented out of concern that patents were being awarded too easily, resulting in successful, costly litigation against non-patent-holding firms that didn’t seem to be unfairly infringing on a patent. Instead of the costly and intimidating process of going to court, many patent challengers could bring their complaints to the PTAB.

Under the AIA, the PTAB has greater jurisdiction than a previous Patent Office review panel to decide post-grant challenges and review patentability. It also has a lower burden of proof for patent invalidation and uses a shorter, more efficient review process—characteristics that are inviting to potential petitioners. According to Matthew Cutler, an attorney at the law firm Harness Dickey, a review can now cost about $300,000 and take up to 18 months to complete, as opposed to conventional patent litigation through the federal judiciary, which could cost $3 million or more and take several years before being resolved.

More galling to drug makers is the AIA adopted three different avenues through which petitioners can challenge a patent’s validity. Two of those avenues—including the one used by Bass—permit the filing of petitions by entities that many drug makers believe shouldn’t have standing. In the view of the drug makers, these two forms of review provide too many opportunities for nuisance petitions. BIO’s Greenwood, thinking of Bass specifically, recently called on Congress to change the review system and stop him from “exploiting the … patent challenge proceeding as part of his cynical short-selling strategy against innovative biotech companies that are delivering transformative therapies to patients in need.” Pharmaceutical and biotech firms strongly recommend amending the AIA to eliminate the eligibility of “third party” petitioners to challenge patents.

Results of reviews / Are the new AIA petition procedures providing avenues for abuse? A report compiled by Harness Dickey, Harnessing Patent Office Litigation: Volume IX, examined review petitions filed in the first 30 months (through last March 16) of the new regime and found that 383 “chemical or biotechnology” patent challenges had been filed. That represents just 15.1 percent of the 2,536 reviews that were instituted during that time period, behind “electrical and computer” patents (1,549) and “mechanical and transportation” patents (594) but ahead of “design” (10). The PTAB, in its final written decision, canceled patents in 84.8 percent of all cases, including 87 percent of the chemical or biotechnology patents. So, though relatively few of the challenged patents are for drugs and other chemicals, most of those challenges have been successful.

If those patents had been blocking the fair use of new drugs, their revocation should benefit both human health and the economy. The 87 percent rate of invalidation for chemical and biotech patents may accurately reflect exactly what Eric Spangenberg, an intellectual property consultant to Bass’s Coalition for Affordable Drugs, said in a prepared statement: “A small minority of drug companies are abusing the patent system to sustain invalid patents.”

Did Congress get the petition regime right? / So, if most cases of review are finding bad patents at relatively low cost, should we consider the AIA’s patent review provision a legislative success story? Perhaps, though some would argue that petitions like Bass’s are an unintended negative consequence. Patent attorney Gene Quinn, writing in IP Watchdog last April, reviewed the legislative history of the provision and its aftermath. According to Quinn:

Post-grant procedures were designed to be an alternative to litigation, and Congress was well aware of at least some potential abuses of the new procedures. The intent was to give those with a justifiable grievance a cheaper, faster forum in which to challenge a patent. Likewise, the procedures were designed to the greatest extent possible to prevent abuse of process and/​or harassment. The legislative history is silent with respect to the type of challenge Bass is bringing, although it stretches the imagination to believe that Congress intended to allow pharmaceutical companies to be subjected to a challenge by an individual or entity that would not have standing to sue in Federal District Court.

So, perhaps patent challengers should be limited to only those with standing. But doing that would undermine one of the goals of the AIA, which is to allow entities to challenge “patent trolls.”

Patent trolls are non-practicing entities (NPEs), which own patents but aren’t actively using them in the production of some good. Instead, NPEs typically are investment firms that search for possible instances of infringement that could result in profitable litigation or settlement, and their preferred patents are in computing and communications. Congress passed the AIA out of concern that NPEs were impeding growth in the tech sector, an important growth sector of the American economy. That concern is reasonable: as James Bessen, Jennifer Ford, and Michael Meurer reported in these pages a few years ago, 75 percent of the NPE lawsuits they examined were initiated against firms in the computer and communications technology class (“The Private and Social Costs of Patent Trolls,” Winter 2011–2012).

To make it as easy as possible for technology companies to invalidate NPE patents, Congress appears to have purposely chosen not to include standing as a requirement for two of the three review procedures. As Harness Dickey noted in its study, 61 percent of all reviews during the examined time period were for patents in the electrical and computer category. Three of the top four petition filers are from the electrical and computer technology category, with Apple at No. 1 (105 petitions), Google at No. 3 (68 petitions), and Microsoft at No. 4 (54 petitions).

But has the battle against patent trolls in the technology industry resulted in friendly fire casualties in the pharmaceutical industry? The early data on invalidation of pharmacologic and biologic patents have shown positive indicators that there are drugs vulnerable to successful post-grant review challenges. That is social and economic good news because it suggests the patents should not have been granted in the first place. That is, the petitions are making these advances more readily available for commercial exploitation and people’s use.

On the side of the angels? / Of course, none of that means Bass’s motivations match his altruistic rhetoric. After all, he has Spangenberg, through his firm nXn Partners, evaluate potential pharmaceutical targets using predictive analytics software to determine the strengths (and weaknesses) of certain pharmacologic or biologic patents. So it seems a lot more likely that Bass is motivated by financial advancement than health advancement.

Nonetheless, that doesn’t mean Congress should “do something” about Bass and anyone else who follows his apparent strategy. After all, if the patents are weak and Bass challenges them, and the challenges result in greater availability of new pharmaceuticals, then the challenges are net beneficial regardless of Bass’s motivations. So, until there is empirical evidence showing net harm, it seems unwise to change the current process.

Some critics of Bass’s tactics may agree with this theoretical point. But, they say, if he and other entities continue filing petitions, the PTAB will become overwhelmed with less-than-credible patent challenge filings, slowing its work of ferreting out truly bad patents.

That concern has not yet materialized, but it could in the future. According to the Harness Dickey study:

As the PTAB’s workload has steadily increased, the time to a Decision to Initiate [a review] has gradually climbed as well. While the Board has statutorily been provided with three months to make that decision, it is taking about two weeks less (emphasis added) than the full statutory allotment to come to a Decision to Initiate.

However, until the PTAB does become overwhelmed, it seems unwise to change the current process. Much like Bass’s tactics, we should wait for empirical evidence that change is needed.

And, for now at least, it seems politically unlikely that any change will occur. It would be a formidable legislative undertaking for pharmaceutical and biotechnology companies to motivate the 113th Congress to “change the [patent] review system,” as BIO’s Greenwood advocates. Biotech firms advocating change will find themselves confronted by technology companies adamantly opposed to limiting third-party challenges to post-grant review procedures.

Before Congress takes up the cause of restraining an onslaught of “reverse patent trolls”—as Bass has been described by his critics—who are assaulting pharmaceutical and biotech firms with “baseless” patent grant review challenges, lawmakers need to carefully evaluate the empirical data on review challenges and decisions against pharmaceutical and biotech patents. As for Bass, his five patent grant review challenges were just 1.3 percent of the 383 “chemical or biotechnology” patent challenges filed in the first 30 months since the inception of the review process—not exactly a giant troll. A “wait-and-see” approach is warranted for discerning whether Bass’ success causes him to file further challenges and other hedge fund managers follow his lead.

Readings

  • “Appropriating the Returns for Industrial Research and Development,” by Richard C. Levin, Alvin K. Klevorick, Richard R. Nelson, and Sidney G. Winter. Brookings Papers on Economic Activity, Vol. 3 (1987).
  • Harnessing Patent Office Litigation, by Dickey Harness. April 2015.
  • “Imitation Costs and Patents: An Empirical Study,” by Edwin Mansfield, Mark Schwartz, and Samuel Wagner. Economic Journal, Vol. 91 (1981).
  • “Patent Abuse or Genius? Is Kyle Bass Abusing the Patent System?” by Gene Quinn IPWatchdog, April 8, 2015.
  • “Protecting their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not),” by Wesley M. Cohen, Richard R. Nelson, and John P. Walsh. National Bureau of Economic Research Working Paper #7552, February 2000.
  • “The Political Economy of Patent Policy Reform in the United States,” by F. M. Scherer. Colorado Journal on Telecommunications and High Technology Law, Vol. 7 (2009).