Inter Partes Review: Bane for Patent Owners, Boon for Investment Firms

The Inter Partes Review can be a bane for patent owners and a boon for investment firms.

Can an investment fund file a challenge to a patent and bet on the outcome? This appears to the case ever since the America Invents Act gave birth to Inter Partes Review proceedings before the U.S. Patent and Trademark Office.

An Inter Partes Review is a route to invalidate a patent before the USPTO’s Patent Trial and Appeal Board, as opposed to bringing the case before a district court. In an IPR, a patent can be challenged on the grounds of anticipation by or obviousness in view of prior art. Only prior art in the form of patents or printed publication can be asserted in an IPR, but IPRs nonetheless have some notable advantages over district court proceedings. First, IPRs are relatively inexpensive to file as compared to district court cases. IPRs also adhere to different standards than district courts to invalidate a patent. While a district court is bound to interpret the words of a claim according to their ordinary and customary meaning, the PTAB examines claims under the broadest reasonable interpretation standard. This means that claims a district court may find patentable over the prior art could be found patentable in an IPR. Another notable advantage is that anyone can file an IPR to invalidate a patent, which brings us to investment mogul Kyle Bass. (continued below...)
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Bass is the president of Hayman Capital, a Texas based hedge fund. He is noted for two particularly interesting investment strategies, the first being his prediction of and profit from the recent mortgage crisis. The second, his latest strategy, involves filing IPR petitions against pharmaceutical companies and then shorting their stock or investing in their competitors. The obvious question here is “Does it work?” The answer is sometimes, but Bass and company don’t appear to be waging bad bets, considering that over 75% of patents in IPR proceedings have had at least one claim struck. In the wake of Bass’s first IPR filing against Acorda Therapeutics involving the drug Ampyra, Acorda’s stock price dropped approximately 10%, although his more recent filings against other companies have been met with a mix of changes in stock prices.

Upon hearing about this investment strategy, people’s first reaction is “That’s legal?” The answer is yes. What Bass is doing is legal. These are not frivolous lawsuits. The PTAB will only initiate an IPR if the prior art being asserted could reasonably be interpreted as anticipating the claims of the patent or rendering them invalid as being obvious variations of the asserted prior art. This is a classic example of the letter versus the spirit of the law giving rise to (presumably) unintended consequences. IPRs were designed to be a low-cost alternative to litigation in the courts, aimed at allowing parties to settle disputes over claims without spending millions. Bass’s strategy is certainly well outside of the intentions of IPR proceedings, but the PTAB has initiated IPRs in 7 of the 13 petitions filed by Bass and his associates, and there are at least 20 cases pending before the PTAB. The PTAB has also stated that “profit is at the heart of nearly every patent and nearly every inter partes review” when they ruled in September that Bass’s practice did not constitute an abuse of the IPR process.

An Inter Partes Review is a route to invalidate a patent before the USPTO’s Patent Trial and Appeal Board, as opposed to bringing the case before a district court....anyone can file an IPR to invalidate a patent.

In response to allegations that he is abusing the system, Bass and others in his investment fund and legal team have pointed out that a small number of pharmaceutical companies rely heavily on a few weak patents, and use them to artificially inflate drug prices. If this is truly the case, then the outcome of the Bass-initiated IPRs will result in a number of unhappy patent owners but some very happy investors.

There is hope for Bass’s besieged patent owners in the form of the Protecting American Talent and Entrepreneurship Act, or PATENT Act for short. While the Act currently proposes only minimal changes to IPR proceedings, there is a considerable amount of lobbying to change both the standards of review and who can file an IPR, primarily to thwart strategies like Bass’s. Similarly, the Innovation Act (discussed in one of our previous blog posts) would amend post-grant proceedings such that the PTAB would have to interpret claims under the same doctrine of ordinary and customary meaning that district courts use. But since the PTAB has determined there is nothing wrong with investment firms filing IPR petitions, it will be up to Congress to decide whether this unintended consequence of the America Invents Act should be squelched.