Joff Wild

This time a few months ago no-one inside the world of IP would have given Hayman Capital founder and manager Kyle Bass a second thought, unless they were one of his investors. Now, though, his name is on everyone’s lips. Since teaming up with Erich Spangenberg back in the early part of the year to launch the first of what has become a series of IPR petitions aimed at patents owned by pharmaceutical and biotechnology companies, Bass has helped shape the narrative on patent reform in the US and has drawn vociferous condemnation from an entire industry.

Bass believes that there are a number of life sciences patents out there that should not have been granted and that by challenging their validity before the PTAB he can not only make money himself, but also significantly reduce healthcare costs for US consumers and the country’s government.  His critics claim that he is exploiting a process in a way that was never envisaged by the America Invents Act, and that he is doing it for nothing more than short-term, financial gain.

Bass is currently on a trip to the UK and earlier this week I caught up with him in London to get his perspective on the storm that he and Spangenberg have created. During the interview, what became very apparent very quickly was that Bass is in it for the long-term. He is convinced that there are drugs out there underpinned by patents that should not have been granted, and that there are opportunities in this.

More than anything, though, Bass gave every impression that he believes he is doing the right thing. “We are helping the market to make the distinction between ‘patent squatters’ and true innovators. If you are a squatter using patents listed in the Orange Book to maintain an undeserved monopoly and manipulate drug prices, then we are going to be coming after you,” he said. “But if you are, say, an innovative biotech company with foundational IP, then we are going to be an investor.”

Bass is scathing about the response he and Spangenberg have received from the pharma sector which, he says, is seeking to discredit their motives instead of dealing with the issues that the IPRs they have filed raise: “They are using Erich and me as a punching bag so that they can exclude themselves from the whole IPR system. They have not been able to criticise the substance of our claims, instead they are focusing on the messenger and process.” But Bass is adamant that the pair will not be deflected: “We are seeking a merit-based review of patents that we think should never have been issued.  We will not settle short of decision by the PTAB. This terrifies big pharma and they have launched a campaign to convince people that we are only interested in profiting from short-term stock swings.”

Although Bass would not speak about his investment strategy – citing concerns about US laws forbidding such discussions with the press – last week IP attorney and investor Dan Ravicher posted a blog piece pointing out that of the seven companies so far targeted by the Bass/Spangenberg actions only two have seen their share prices fall subsequently. If Ravicher has noticed that, then no doubt Bass has too. Someone in it just to take advantage of immediate shorting opportunities would surely be looking at those numbers and deciding that they were not working out; but still the detailed petitions keep on coming.

What seems much more likely to me is that as a savvy investor Bass sees a range of short-term and long-term opportunities in what he is doing. Smart share trading at various stages of the IPR process is presumably one of these, but other strategies could include, for example, investing in generic companies that might benefit from certain patents being rubbed out and innovative companies with strong IP and interesting pipelines. As Bass said to me: “True innovators deserve patent exclusivity; they are saving lives. The squatters and those relying on ever-greening do not.”

What certain life sciences companies fear most, Bass claimed, was not him and Spangenberg as individuals, but the challenge to a cosy consensus they represent and what their actions could lead to: “We have said that we are going to be filing against less than 1% of drugs, so I don’t think that the pharma companies are scared of us. But they see the process that we have begun as being one that will cause them major problems. Going in front of three judges at the PTAB is very different to putting a charismatic lawyer in front of a jury. At the PTAB you have to win on the merits and nothing else.” The point being, I suppose, that the Bass/Spangenberg initiative is one that all kinds of other entities could follow and, indeed, have already begun to. But it’s not just hedge fund investors who could get involved, the AIA allows anyone to file an IPR for whatever reason; so that could also include NGOs, wealthy individuals and, who knows, perhaps even insurance companies and US government agencies.

During the patent reform legislative process now taking place in both houses of Congress different ways to reform the IPR system to reduce the perceived threat posed by investors such as Bass have been proposed. These include: exempting the life sciences industries from IPRs altogether, or significantly reducing their exposure to them; limiting the right to file an IPR petition to companies being sued or in other ways targeted by the relevant patent holder; and restricting the rights of those who stand to make a direct financial gain from an IPR to file one.

“We are worried about possible legislative changes, sure; but we are also focused every single day on managing the challenges that arise,” Bass said. He did expand on that, but I was reminded of something I was told when I was in Silicon Valley earlier this year along the lines of “there is no-one in the any legislator’s office who knows the patent system or is smarter than Erich Spangenberg”. In short, if obstacles are put up, IPNav’s founder has the ability and the insight to help Bass find ways round them. After all, as Bass explained to me, it was Spangenberg who identified the pharma IPR opportunity in the first place and then sold it as an idea to Bass having been introduced to him via mutual friends (the pair have homes just streets away from each other in Dallas, but had never met before last year).  

It’s hard to disagree with claims that the authors of the America Invents Act did not foresee hedge funds challenging life sciences patents and that the Bass/Spangenberg actions are an unintended consequence of that legislation. But it is also undoubtedly the case that Congress mandated that any and all types of party have the right to challenge patents they feel should not have been granted. And having spoken to Bass, it is clear to me that whatever profit he ends up making from his challenges and in whatever ways he generates it, he genuinely thinks that the rights his IPR petitions have targeted were incorrectly awarded.

This blog has given extensive coverage to how IPRs are used by Big Tech companies and other major players to issue multiple challenges to patents owned by SMEs and NPEs that have sued them, pushing up plaintiff costs and subjecting them to serial jeopardy. Bass, by contrast, has focused his sights on large companies with deep pockets that can afford to defend cases at the PTAB, even if they would prefer not to. At the end of the process, if they end up losing the patent in question then that is merely an IPR doing what it is supposed to do. Preventing or deterring someone from initiating an IPR because you do not like their business model is exactly the same as seeking to prevent someone from litigating because you do not like their business model. From where I sit, neither is the right thing to do. In the end, I suppose, you either believe in high quality patents or you don’t.