Don’t Sell This IPR Strategy Short

Recognized for his business acumen when predicting the 2008 subprime mortgage crisis, hedge fund manager J. Kyle Bass is now attempting to capitalize on the pro-petitioner tendencies of the Patent Trial and Appeal Board (PTAB), notoriously dubbed the patent “death squad.” Earlier this year, Bass founded the Coalition for Affordable Drugs to target patents that he believes “have little value other than to drive up prescription drug prices.” Accusing pharmaceutical companies of reaping “monopoly profits”, Bass has begun challenging the validity of pharmaceutical corporations’ patents through a process called inter partes review (IPR). The adjudicatory proceeding, conducted by the PTAB, allows third party challengers to dispute the patentability of one or more claims in an already-issued patent.1 If successful, Bass’s crusade would allow generic companies to start manufacturing their own versions of the drugs at drastically reduced prices.

But many have been skeptical of Bass’s altruistic undertaking, accusing Bass of abusing the patent system for financial gain. Bass has insisted that his motives are not purely monetary, but about policing “abusive patent tactics” used by “a small number of monopolistic drug franchises.”2 Still, Bass admits that there is a profit motive behind every company pursing IPR proceedings. In fact, Bass has been “shorting,” or betting on a stock decrease, in the companies he has targeted, hoping to create drops in their stock by placing companies’ intellectual property rights in jeopardy. Moreover, Bass’s firm holds stake in generic drug manufacturers, such as Perrigo and Mylan, that would greatly benefit from a PTAB ruling of drug patent invalidity.

On February 10, the Coalition for Affordable Drugs filed its first IPR petition against Acorda Therapeutics, a biotechnology company based in Ardsley, New York. The same day the petition was filed, Acorda’s stock fell almost 10 percent. As of September 7, Bass has filed an additional 30+ IPR petitions against pharmaceutical companies.

While it seemed like Bass’ biotech shorts were destined for success, the USPTO has recently denied institution on three of Bass’ IPR filings. The first two filings, against two Orange Book-listed patents for Acorda’s Ampyra®, were rejected by the PTAB for failing to present sufficient evidence to demonstrate that posters, used as the basis for the IPR, were prior art under 35 U.S.C. § 102. The third filing, against Biogen’s Tecfidera®, was denied on the merits. In that decision, the PTAB found that the cited prior art references did not establish obviousness and as such, the petitioners had failed to establish a likelihood of success as to any challenged claim. Instead of rendering a decision based on the “improper purpose” of the challenge, as many pharmaceutical companies have advocated, the PTAB denied each filing based on substantive reasons.

Furthermore, the PTAB has refused to sanction Bass on grounds raised by global biopharmaceutical company Celgene for abuse of process. Celgene’s motion argued that Bass’ petitions are contrary to the congressional intent for “expeditious and less costly alternative to litigation,” as they are driven purely by financial motivation. In rejecting the motion, the PTAB acknowledged that “[p]rofit is at the heart of nearly every patent and nearly every inter partes review.” On the issue of Bass’ short-selling strategies, the PTAB noted, “We take no position on the merits of short-selling as an investment strategy other than it is legal, and regulated.”

While Bass may still be allowed to file IPR petitions challenging drug patents, it remains to be seen whether his strategy will ultimately prove effective. The well-endowed pharmaceutical industry is fighting back to end what they refer to as an egregious abuse of the system. Their impassioned response has caught the attention of Congress, and legislation has specifically been proposed to address the concern. For example, the Innovation Act, sponsored by Congressman Goodlatte, has introduced provisions designed to put an end to hedge fund sponsored IPRs.3 In a more extreme attempt, the STRONG Patents Act of 2015 has suggested that a party may not file an IPR petition unless the party has been accused of infringement.

  1.  The lenient standing requirement under 35 U.S.C § 311 (a) grants any “person who is not the owner of a patent” the right to “institute an inter partes review of the patent.” (See also 37 CFR 42.101 – Who may petition for inter partes review).

  2.  Kyle Bass’s Office Statement to House Committee, April 14, 2015
  3.  (15) providing that a review may not be instituted unless the petitioner certifies that the petitioner and the real parties in interest of the petitioner—“(A) 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, during a period following the filing of the petition to be determined by the Director; and“(B) have not demanded payment, monetary or otherwise, from the patent owner or an affiliate of the patent owner in exchange for a commitment not to file a petition under section 311 with respect to the patent that is the subject of the petition, unless the petitioner or the real party in interest of the petitioner has been sued for or charged with infringement of the patent, during a period to be determined by the Director.”.