PTAB must bite bullet and make definitive call on hedge fund inter partes review requests

On September 1 the Patent Trial and Appeal Board (PTAB) of the US Patent and Trademark Office (USPTO) declined to institute a petition for the inter partes review of US Patent 8,399,514, owned by Biogen. It had been requested by the Coalition for Affordable Drugs, an organisation established by hedge fund investor Kyle Bass and IPNav founder Erich Spangenberg.

Reaction to the decision was mixed. On the Patents Post Grant blog, Scott McKeown said that the PTAB had made the right call: “The Board’s decision in the Biogen IPR is supportable on a variety of bases. First, prior art in the unpredictable arts must be enabled for the particular use being claimed in the target IPR patent … Second, the prior art must provide a reasonable expectation of success in unpredictable arts for achieving the utility in the claimed invention. … The ‘obvious to try’ test, as employed in the predictable art arrangement subject to the KSR dispute, is limited to routine experimentation involving a finite number of techniques with predictable results. Here there was no dispositive testing in the prior art that demonstrated the claimed utility of the lead compound for effective treatment of MS.”

On the IP Watchdog blog, though, Gene Quinn was not impressed: “If the Board is going to institute IPR trials only in the most egregious cases fine, but this IPR institution denial decision has numerous logical and legal flaws. Clearly, the description of the Phase II clinical trial was a publication that can be used as prior art in an IPR proceeding. The petitioner submitted journals going back years all teaching DMF as a means to treat multiple sclerosis. Thus, I have to wonder whether this decision has more to do with Kyle Bass than with the law.”

Prior to its Biogen ruling, the PTAB had also turned down inter partes review petitions from the coalition relating to two patents owned by Acorda. So far, then, the score in Bass/Spangenberg v Big Pharma is 0-3.

Since February, Bass and Spangenberg have filed more than 30 inter partes review petitions at the PTAB, all of them aimed at patents owned by life sciences companies. Bass has made no secret of the fact that his aim is to make money for his investors, but he has also been clear that he believes the targeted patents were incorrectly granted. “We are seeking a merit-based review of patents that we think should never have been issued,” he told IAM in an exclusive interview in July.

Although most media attention on the inter partes review challenges that the pharma sector is currently facing has focused on the Coalition for Affordable Drugs, others are also getting in on the act. In March investment vehicle Ferrum Ferro Capital filed an inter partes review against a patent owned by Allergan. An inter partes review was also filed in May by Neptune Generics, an entity ultimately owned by litigation funder Gerchen Keller Capital, against a patent developed by Auspex Pharmaceuticals, which was recently acquired by Teva.

For their part, pharma and biotech companies have lambasted the Bass/Spangenberg strategy. “Predatory hedge funds are short-selling the stock of patent-dependent companies, then challenging the companies’ legitimate patents at the PTO to rattle the stock market, and then attempting to profit from a resulting drop in the companies’ stock price,” wrote Jim Greenwood, the president and CEO of BIO and John Castellani, the president and CEO of PhRMA.

The pair claimed that such activities were never envisaged by Congress when it passed the America Invents Act and “discourage future investments in new medicines”. The solution is simple, they concluded: “Exempting biopharmaceutical patents from IPR would end this abuse, while continuing to allow the use of IPRs to challenge problematic patents identified by other industries reliant on intellectual property.”

Thus, the PTAB and the USPTO find themselves in the middle of a political firestorm that is not of their making. However, it is one that they have to address.

As of September 21, Bass and Spangenberg had filed 32 separate inter partes review challenges. According to figures from the USPTO, of the 1,777 inter partes review petitions that had reached a final disposition by the end of July, 827 had been instituted. Of the 950 that had not been instituted, 372 were settled prior to institution. Given that Bass has stated that the Coalition for Affordable Drugs is not interested in settlements under any circumstances, statistically speaking, more than half of its challenges could end up being heard.

What is more, while Bass is not steeped in patent law and practice, Spangenberg certainly is. The chances of him overseeing the filing of dozens of petitions in which technical, case-specific reasons or arguments on the merits not to institute a case can be found are close to zero. Spangenberg knows what he is doing.

Although it may not want to, at some stage the PTAB will have to bite the bullet and rule on whether Bass and Spangenberg have standing to bring their petitions and whether their motives are consistent with those allowed under the inter partes review procedure. Whichever way that decision goes, it will be highly controversial, so the PTAB’s reluctance is understandable. But it is not acceptable.

The longer the PTAB fails to rule on standing and motive, the more inter partes reviews from Bass and Spangenberg – and others – it is inviting. That means financial and time costs for petitioners and patent owners alike, as well as more work for the PTAB itself.

More importantly, though, if the PTAB ignores standing and motive, but still fails to institute any Bass/Spangenberg petitions, that may call its impartiality into question. The PTAB must be regarded by all users as a disinterested party. Should the feeling develop that some are more (or less) equal than others, the entire system will soon fall into disrepute – something that the PTAB itself, the USPTO and the wider US justice system cannot allow to happen.