A new kind of non-practicing entity arrived at the Patent and Trial Appeal Board (PTAB) earlier this year: hedge funds. The arrival marks the dawn of “reverse monetization,” in which a party may extract value by eroding another party’s patent rights. For example, a party might petition for inter partes review (IPR) of a patent and short the patent owner’s stock or take another approach to extract value from the event. As a result of such filings, an intense public debate has arisen and Congress is already considering new legislation to prevent funds from using post-grant proceedings to influence stock prices.
Presently, anyone “who is not the owner of a patent” may file a petition to institute an IPR of the patent. 35 U.S.C. § 311(a). The current statute does not require that a petitioner be a defendant in a patent infringement lawsuit, or have been charged with infringement. Taking advantage of the broad standing to petition permitted under the statute, hedge fund Hayman Credes Master Fund L.P. (Hayman), under the name Coalition for Affordable Drugs (ADROCA) LLC (ADROCA), has filed multiple petitions against drug patents. Kyle Bass, the manager and principal of Hayman announced that he would “lower drug prices for Medicare and for everyone” by challenging drug patents using IPR proceedings.
The first salvo was fired by ADROCA when it filed a petition for IPR of US Patent No. 8,663,685, which discloses the use of 4-aminopyridine in the treatment of Multiple Sclerosis and allegedly covers AMPYRA®, owned by Acorda Therapeutics, Inc. (Acorda). After the petition was filed, shares of Acorda stock (ACOR) fell 9.65%. While the PTAB has not yet instituted trial based on the petition, Acorda filed a Preliminary Response to ADROCA’s petition on May 26, 2015 highlighting several policy arguments against allowing hedge funds to abuse the IPR process.
In its Preliminary Response, Acorda argued that the ADROCA’s petition was “an attempt to profit in the stock markets merely from the public’s reaction” to the filing. Petition at 1. Specifically, the “much-publicized filing at issue here has been widely described as part of a strategy devised by Mr. Bass to profit by using the IPR process to drive down the price of [Acorda] stock in which he or his investment funds held short positions.” Petition at 6.
In light of the onslaught of IPR filings by ADROCA, which now include fourteen additional petitions for IPR against eight publicly traded biopharmaceutical companies, Acorda argued that such filings “are a costly drain on the Office’s resources” and, as a “tool to manipulate markets,” “not what Congress intended.” Petition at 2. Specifically, Acorda argued that Congress’ aim in establishing the IPR process was to “provid[e] quick and cost effective alternatives to litigation[,] . . . not . . . [a] tool for harassment.” Id. (citing H.R. Rep. No. 112-98, pt. 1, at 48). As such, it urged the PTAB to exercise its discretion under 35 U.S.C. § 314(a) to deny institution of the IPR petition. Prompted by the deep public interest concerns surrounding the ADROCA petitions voiced by Acorda and other pharmaceutical companies, Congress is already considering significant changes in recent patent legislation. See H.R. 3309 (113th): “Innovation Act" (Manager’s Amendment) (June 9, 2015) (requiring certification from petitioners that it and any of its interested parties "do not own and will not acquire a financial instrument ... 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.")
As we previously noted, in “Privy in IPR: What is the Relevant Time Frame,” and “Uncertainty Regarding The Scope Of “Privy” And “Real Parties-In-Interest” In AIA Proceedings Remains,” patent owners involved in AIA proceedings should raise challenges, where applicable, in their responses submitted to the PTAB based on “privy” and “real parties-in-interest.” Acorda did precisely so, urging the PTAB to deny institution because of ADROCA’s “failure to name its investors and identify them as real parties-in-interest.” Specifically, ADROCA failed to identify Hayman as a real party-in-interest. Acorda also argued that Hayman has a self-described fiduciary duty to its investors which further compels a finding that the investors are real parties-in-interest.
Celgene Corp. (Celgene), one of the eight biopharmaceutical companies targeted by ADROCA, has attempted to fight back in another way. It recently requested authorization to file a motion for sanctions against ADROCA in each of the four proceedings filed against it. Order, Coalition for Affordable Drugs v. Celgene Corp., case numbers IPR2015-01092, IPR2015-01096, IPR2015-01102, IPR2015-01103 (June 9, 2015). Celgene indicated that the basis of its motion for sanctions includes abuse of process. For the first time, the PTAB authorized a patent owner’s motion for sanctions under 37 C.F.R. § 42.12. The current statute permits the PTAB to impose a sanction against a party for misconduct, including “[a]ny … improper use of the proceeding.” 37 C.F.R. § 42.12(a)(7) (emphasis).
The PTAB has not yet instituted trial on any IPR petition filed by a hedge fund or taken a position with respect to whether such a petition constitutes an abuse of process. But the arrival of hedge funds to the PTAB has highlighted what seems to be an unintended consequence of opening the process up to anyone. We await further clarity from the PTAB on these very controversial issues, unless Congress curbs the ability of hedge funds to petition for IPR first.