Joff Wild

So now we can be pretty certain: the motive for submitting a petition for an inter partes review at the Patent Trial and Appeal Board is not important, what matters in the decision on whether it should be instituted is that it has a reasonable chance of success. That’s a big win for the likes of Kyle Bass and other hedge fund managers; and a concern for patent owners, not only in the life sciences industries, but also in many other sectors and, perhaps in particular, for public IP companies (PIPCOs).

Yesterday, the PTAB agreed to review patents relating to secure internet communications owned by VirnetX following challenges to them submitted by Mangrove Partners. In contesting the petition request, VirnetX had argued that the hedge fund was motivated solely by a desire to secure short-term financial gain. “This proceeding was filed in an apparent attempt to manipulate the financial markets to increase the value of the Mangrove Partners Hedge Fund’s short position in VHC stock,” VirnetX stated. The PTAB said that did not matter. “An economic motive for challenging a patent claim does not itself raise abuse of process issues,” wrote Joseph Siu, one of the three judges hearing the case. “We take no position on the merits of petitioner’s investment strategy.”

The ruling follows one made by a six-judge panel on 25th September in a case brought by Celgene, which had asked for sanctions to be imposed on the Coalition for Affordable Drugs, the entity that Bass established with Erich Spangenberg to file IPRs against patents owned by life sciences companies which they believe should not have been granted. In its decision to turn down the biopharmaceutical company’s request, the panel stated: “Profit is at the heart of nearly every patent … As such, an economic motive for challenging a patent claim does not itself raise abuse of process issues."

After a series of reverses at the Board, this was a very big win for Bass and Spangenberg. Yesterday they got another one when the PTAB agreed to initiate a review of a patent relating to Lialda, Shire’s ulcerative colitis drug. At least 30 more Coalition IPR petitions are still to be determined.

It's hard to escape the conclusion that the last fortnight has been very significant in the short history of the PTAB. Not only do we now know that the financial motives of petitioners are not an issue when deciding whether to initiate reviews, but also that it is not just life sciences companies that should be wary of investor action. VirnetX is listed on the NYSE Amex, operates in the internet security space and makes the majority of its money from patent and technology licensing. In other words, it is a PIPCO.

For hedge funds looking to short stock, what is not to like about the potential for seeking reviews of patents owned by companies that live or die on their ability to enforce those patents – especially given the way that markets generally react to bad PIPCO news?  If I were running such a business, yesterday’s ruling would concern me greatly.

But beyond that, there is now every motive for hedge funds to go looking for other industries and companies that have very close ties to patents, and to target them too. After all, given the general ignorance of patents in the markets, there is every chance that a review request combined with carefully targeted PR could well produce a highly profitable dip in stock price. Although Bass has made clear that he is not interested in settlement, that does not have to be the case for others – so taking the process through to conclusion may not even be necessary to rake in the dollars.

Given what it is at stake, it is likely that Celgene will file a motion to get the PTAB to reconsider its decision. VirnetX may do the same in its case. But the chances of success for either are not high, especially given that nine PTAB judges have already made their feelings clear. There could also be a direct appeal to Michelle Lee as Director of the USPTO. But after the controversy surrounding the Turing Pharma price raising it seems unlikely that she would want to get involved in something that could be portrayed as siding with companies seeking to keep drug prices high; while anything that smacks of favouring an NPE is surely out of the question. Beyond that, the courts might be a possibility. But it will take time and cost a great deal of money, with only an outside chance of prevailing.  

The pharma and biotech response to the Bass/Spangenberg attacks has been to advocate a carve-out for life sciences patents from the IPR process. That always looked tenuous, but given the VirnetX decision it now looks nigh on impossible to justify. It is clear that different types of business in a variety of industry sectors are vulnerable to petitions designed to enrich investors, so if carve-outs are good enough for pharma and biotech, why should they not be good enough for other sectors too? Carve-outs don’t just protect from one kind of IPR petitioner, but from all. In life sciences that might mean generic companies, patient groups and insurers; in other industries it would mean equally legitimate challengers. In short, if you start legislating for carve-outs, you basically kill off the IPR process. That might be popular in some quarters, but it will be very unpopular in many others - not least in big tech circles.

With legislative action to change the PTAB’s brief unlikely and the chances of successful legal challenges low, it looks like we have entered a new normal. It is probably correct to say that those who drafted and agreed the America Invents Act did not foresee the possibility of investor interest in the IPR process and that what has panned out is an unintended consequence of the legislation. But we are where we are. Undoing things is going to be incredibly difficult. The patent death squad just got even more frightening.