Magazine Article | May 4, 2015

Patent Reform Pits Life Sciences Against High-Tech And Hedge Funds

Source: Life Science Leader

By John McManus, president and founder, The McManus Group

Shivers went down the spine of many biotech executives when Kyle Bass’ hedge fund, Hayman Capital Management, announced it would exploit a relatively new provision in patent law that allows any person (not just a generic competitor or related party) to challenge and invalidate patents at the U.S. Patent & Trademark Office (USPTO).

Acorda Therapeutics’ stock fell about 10 percent in one day with the news that the patent for Ampyra, the company’s treatment for MS, was being challenged by Hayman Capital under the new “inter partes review” (IPR) process at the Patent Trial & Appeal Board. Bass had apparently shorted the stock in advance and made millions overnight.

IPR was enacted as part of the America Invents Act of 2011, in large part at the insistence of the high-tech industry (Google, Apple, Microsoft, etc.) which was being plagued by patent trolls — shell companies with no manufacturing or supply capacity that simply obtain patents in order to extract settlement agreements or launch infringement lawsuits and extract licensing fees. Sometimes the patent claims in question have been drawn improperly broadly or are not actually infringed, but it may require several million dollars and years to litigate the matter through the federal courts including appeals. IPR is designed as a faster, less costly alternative to litigation.

The high-tech industry’s business model is markedly different from the life sciences industry. Unlike the 10 to 14 years it takes to bring a drug from discovery (when only a handful of patents are filed) to market, high-tech products (that rely on hundreds or even thousands of patents per product) are brought to market in relatively short order. Patents for these products become obsolete in a couple of years and are seen as nuisances, as the next generation of products are produced and marketed. In contrast, a novel biopharmaceutical is protected by only a few patents, which are reported and published by the FDA’s Orange Book; a process that essentially announces, “Look at me, I am very important!”

Thus, IPR was intended to provide a speedier and less-expensive alternative to typical court proceedings. The IPR process also requires a lower burden to prove invalidity, utilizing a “preponderance of the evidence” standard (i.e., 51 percent) with no presumption of validity, whereas federal courts require “clear and convincing evidence.”

“Individuals should not be permitted to hamper innovation by extorting America’s inventors.”

Moreover, where federal court proceedings can cost millions, IPR may cost only a few hundred thousand dollars. It was meant to require that patents have the narrowest application that do not conflict with prior art (knowledge that already exists). Due to advantages in proceedings, the “kill rate” (or invalidation rate) of patents at the IPR is nearly 80 percent compared to 45 percent in court.

Hedge funds and others clearly have taken notice — and taken aim. The IPR process permits any party to bring the challenge, not just competitors. While some hedge funds adopt Hayman Capital’s approach of shorting the stock, others are demanding extortion-like cash settlements.

The drug industry now has turned to Congress for legislative relief but finds a generally inhospitable environment. Last Congress, the House of Representatives passed Judiciary Chairman Bob Goodlatte’s (R-VA) hightech- friendly patent reform legislation with 345 votes. He has reintroduced the identical bill — The Innovation Act — feeling little need to change the bill.

But the life sciences industry and many others, including universities, are now mobilizing. On April 14 the Biotechnology Industry Organization (BIO) testified at the House Judiciary Committee, stating: “IPR is undermining the value and predictability of patent rights and wreaking havoc on legitimate, investment-backed expectations of patent holders. … The biotechnology industry is particularly vulnerable to [stock price] manipulation, because the vast majority of our industry consists of small companies that tend to derive most of their revenue from one or two products on the market, and — unlike cellphones or computers — have just a handful of very valuable patents protecting those products. The mere filing of an IPR can have a significant impact on the stock prices of such companies, as well as their ability to continue to raise the investment needed to develop future treatments for patients in need.”

Bob Armitage, a patent expert with long experience in the life sciences industry, testified that changes to the IPR system are in order so that the proceeding “could no longer be perceived as legal nectar for investment bees looking for their next sting.”

BIO also argued that the patent troll concern may be overstated. A 2013 Government Accountability Office report noted that alleged patent trolls file less than 20 percent of litigation cases, while traditional businesses file 68 percent of patent litigation.

Moreover, the patent landscape has changed since enactment of the America Invents Act. The Supreme Court decided five patent cases that: 1) make it easier to defeat patents and have fee-shifting awarded in appropriate cases; 2) narrow the scope of patentability; and 3) disincentivize meritless claims. Indeed, patent suits have dropped 18 percent from 2013 to 2104 (5,008 vs. 6,083, respectively). Judges are now granting 80 percent of all motions to stay patent litigation if the patent is also involved in a parallel IPR or “covered business method” proceeding.

Yet much of Goodlatte’s legislation would make it more difficult and costly to defend patents and create more uncertainty for innovators. For example:

  • new requirements under which initial complaints in patent lawsuits would be required to provide increased detailed information or be deemed insufficient and subject to motions to dismiss
  • mandatory stays of discovery pending patent claim construction, forcing delays as much as a year or more in typical litigation.

However, there is one positive in the legislation for the life sciences industry. The bill repeals the broadest reasonable interpretation (BRI) provision — the prepatent review standard designed to narrow claims so they do not conflict with prior inventions. But the life sciences industry, the American Bar Association Intellectual Property Law section, the American Intellectual Property Law Association, and the Intellectual Property Owners all argue that the bill should adopt the same rules applied by federal courts, i.e., presumption of validity and “clear and convincing evidence.” (Senator Christopher Coons [D-DE] recently introduced legislation making those reforms.)

Republicans are also enamored with the “loser pays” fee-shifting provisions in Chairman Goodlatte’s bill because they believe it will discourage frivolous lawsuits from patent trolls. That provision is seen as a substantial advance in tort reform. While it unites the hightech industry and many large pharmaceutical companies, it has sparked opposition of the trial bar, universities, and small biotech companies, making for messy politics.

Lobbying by all affected parties has been intense, since the House Judiciary Committee will soon mark up its legislation, and a new legislative package also is expected in the Senate led by Majority Whip John Cornyn and future Democratic leader Chuck Schumer — an odd but very powerful duo. But the outrageous actions by certain hedge funds could spark the similar interest that initiated action on behalf of the hightech business community with respect to patent trolls: individuals should not be permitted to hamper innovation by extorting America’s inventors. What hangs in the balance? Increased speed of Google’s search engine … and fundamental harm to the most innovative and rewarding medical development system ever seen.

Update on Physician SGR
I’ve written several columns about Medicare’s dysfunctional physician payment system, which illogically ties physician reimbursement to GDP per capita. Congress had blocked pending cuts 17 times in a dozen years, and the inexorable problem worsened as looming cuts steepened and threatened physician practices with unsustainable cuts. The annual “doc fix” constantly threatened the life sciences industry and all health sectors with cuts to help offset the cost of those bills.

In April, Congress enacted the most significant reform to health policy since the Affordable Care Act when it passed a bipartisan compromise by wide margins (392-37 in the House and 92-8 in the Senate) to eliminate those cuts and establish more predictable reimbursement for physicians and encourage bundling, capitation, and other innovative arrangements. The bipartisan coalition was able to decisively beat back opposition from groups on the right, who argued that the bill had to be fully offset, and groups on the left who objected to provisions requiring greater beneficiary responsibilities. Democrats won more funding for low-income programs while Republicans initiated greater means-testing and reforms to first-dollar coverage.

A harbinger for more bipartisan action in healthcare?