Hedge fund spurs patent reform in the US


Financier Worldwide Magazine

August 2015 Issue

August 2015 Issue

In 2011, the America Invents Act created a procedure for challenging issued patents at the US Patent Office called inter partes review. The US Congress designed inter partes review as a faster and cheaper mechanism for invalidating improvidently granted patents compared to litigation in a federal court. This procedure has proven effective for doing so. The Patent Office has granted over 70 percent of requests for inter partes review and has invalidated over 70 percent of the reviewed patent claims (which define an invention’s scope).

However, Congress allowed anyone ‘who is not the owner’ of the challenged patent to request inter partes review. With no limits on who may request inter partes review, some surprising entities have employed this procedure.

For instance, in January 2015, US hedge-fund manager J. Kyle Bass, who predicted the subprime mortgage crisis in 2008, announced a plan to employ inter partes review to challenge patents covering prescription drugs. Starting in February 2015, the Coalition for Affordable Drugs (a wholly owned subsidiary of Bass’s Hayman hedge fund) requested inter partes review for patents owned by several publicly traded drug companies, including Acorda Therapeutics Inc, Shire plc, Jazz Pharmaceuticals Inc, Biogen IDEC International GmbH, Horizon Pharma PLC and Celgene Corp.

According to the Coalition, invalidating those patents would lower drug costs by paving the way for generic versions of the patent-protected drugs. Bass has asserted that “weak patents in the pharmaceutical sector impose economic costs that reverberate throughout the US economy in the form of high prices for prescription drugs”. So Bass has said that he plans “to police the abusive patent tactics used by the worst offending drug companies” by requesting Patent Office review.

Congress – prodded by drugmakers – has considered various proposals to curb perceived abuses of the IPR procedure.

But Bass’s Patent Office filings have also advanced an investment strategy. Bass has reportedly taken short positions on the drugmakers’ stock and thus will profit if stock prices drop. The first target, Acorda Therapeutics, saw its stock price drop by about 10 percent immediately after IPR filing.

Congress – prodded by drugmakers – has considered various proposals to curb perceived abuses of the IPR procedure. According to Bass, “Big Pharma has hired 100 lobbyists to lobby both the Senate and the House”.

In March 2015, the Support Technology and Research for Our Nation’s Growth (STRONG) Patents Act of 2015 was introduced in the Senate. If enacted, it would preclude inter partes review unless the party seeking review has been ‘sued for infringement’ or ‘charged with infringement’ of the patent at issue. But this provision may go too far since it would preclude IPR filing by someone who reasonably believes that the patent owner may sue for infringement but who has not yet been accused of infringement.

The STRONG Patents Act received limited support. But various industry groups, such as the Pharmaceutical Research and Manufacturers of America (PhRMA) and the Biotechnology Industry Organisation (BIO), implored Congress to limit IPR filings by hedge funds. So other patent reform bills have addressed inter partes review.

In the House of Representatives, the Innovation Act of 2015 was amended after its introduction to require that an IPR requestor certify that it and any related parties “do not own and will not acquire a financial instrument (including a prepaid variable forward contract, equity swap, collar or exchange fund) that is designed to hedge or offset any decrease in the market value of an equity security of the patent owner or an affiliate of the patent owner”. This amendment specifically targets Bass and the Coalition for Affordable Drugs.

The Innovation Act was also amended after its introduction to address another perceived abuse: obtaining a payment from the patent owner to refrain from IPR filing (called reverse monetisation by some and extortion by others). In particular, the Act requires that an IPR requestor certify that it and any related parties “have not demanded payment, monetary or otherwise... in exchange for a commitment not to” request inter partes review unless “sued for or charged with infringement of the patent”. The House Judiciary Committee has approved these amendments to the Innovation Act.

In the Senate, the Protecting American Talent and Entrepreneurship (PATENT) Act of 2015 was amended after its introduction to address validity challenges at the Patent Office more broadly than the Innovation Act. The PATENT Act does not contain a provision aimed expressly at hedge funds. Instead, it includes provisions that would make validity challenges less likely to succeed. For instance, the PATENT Act as amended: (i) provides that a “challenged patent shall be presumed to be valid”; (ii) gives the Patent Office discretion to decline to institute IPR when doing so would “serve the interests of justice”; (iii) requires patent claims to be interpreted according to their “ordinary and customary meaning” rather than the “broadest reasonable interpretation” now employed during IPR; (iv) directs the Patent Office to engage in rulemaking that would limit the overlap between the individuals who decide whether to institute IPR for a particular patent, and the individuals who evaluate that patent’s validity during IPR if instituted, thus reducing or avoiding potential bias; and (v) directs the Patent Office to engage in rulemaking that would permit sanctions on a party who makes a frivolous IPR filing. The Senate Judiciary Committee has approved these amendments.

By moving forward with the PATENT Act as amended, the Senate seems receptive to the concerns of pro-patent groups that considered inter partes review too slanted against patent owners.

The House and Senate bills each have opponents. For example, an association representing hundreds of US colleges and universities has criticised the Innovation Act because it includes certain provisions that alter patent litigation in federal courts to favour patent challengers. In particular, that association has asserted that the Innovation Act “would weaken the entire patent system... [and] would make it far more difficult, risky, and costly for all patent holders to defend their rights in good faith, and thus seriously undermine the ability of universities to engage in technology transfer”. Not surprisingly, that association “prefer[s] the direction of the Senate PATENT Act”.

No doubt Congress will hold many hearings and engage in much debate over patent reform legislation. Competing bills could appear in the House or the Senate (or both). Lobbying for and against various provisions will likely delay agreement on a bill acceptable to both the House and the Senate. The process may not end until 2016, if then. And that could frustrate those who want change now.


Steven M. Amundson is a partner at Frommer Lawrence & Haug LLP. He can be contacted on +1 (212) 588 0800 or by email: samundson@flhlaw.com.

Mr Amundson has been with the firm since 1997. During his career, he has developed a unique skill to blend his technical and legal backgrounds to successfully articulate his client’s position to the courts. A key to his practice is his ability to understand a client’s business and effectively translate that into concepts judges, juries, and appellate courts can understand. His cases have involved disputes over patents in a broad range of technologies encompassing business methods, computers, electronic devices, electromagnetic products, semiconductor fabrication, medical devices, chemicals, and pharmaceuticals (including “blockbuster” prescription drugs).

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Steven M. Amundson

Frommer Lawrence & Haug LLP

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