Board Finds Profit Motive Acceptable for IPR

While all hedge fund filings considered by the PTAB to date have failed on the merits (Kyle Bass is 0-3 & Ferrum Ferro Capital 0-1), today, the Board declined to outlaw such filings as a matter of policy.  In IPR2015-01092, 1096, 1002, and 1103, Patentee Celgene filed Motion for Sanctions against the Coalition for Affordable Drugs. Celgene sought termination of the IPRs on the basis that the use of the IPR mechanism for pure financial gain (short selling and other investment strategy) was repugnant to the Congressional intent for this alternative to patent litigation. Decisions on the merits of the Celgene petitions remain outstanding. 

In rejecting the motion for sanctions, the Board explained (here):

Profit is at the heart of nearly every patent and nearly every inter partes review. As such, an economic motive for challenging a patent claim does not itself raise abuse of process issues. We take no position on the merits of short-selling as an investment strategy other than it is legal, and regulated. . .  .The Leahy-Smith America Invents Act allows a person who is not the owner of a patent to file a petition with the Office to institute an inter partes review of the patent. 35 U.S.C. § 311. This is in contrast to covered business method reviews, which require a party or privy to have been sued or charged with infringement of the patent. AIA, § 18(a)(1)(B). Accordingly, consistent with the proposition that Article III standing is not a requirement to appear before this administrative agency, we hold that Congress did not limit inter partes reviews to parties having a specific competitive interest in the technology covered by the patents.

While certainly a disappointment for Celgene and other hedge fund targets, given the poor track record of these attacks to date, it remains to be seen whether this business model will survive much longer.  For example, not a single hedge IPR has been instituted to date. With 30+ challenges now pending, if the success rate is 10-20%, the market will no longer be spooked by the mere filing of an IPR. In fact, such already seems to be the case, and rightfully so. I've maintained all along that killing a patent in the unpredictable arts is easier said than done.

Given each one of these IPR petition filings is, conservatively speaking, a $150k investment for any hedge fund, a 10-20% success rate would require a $1-1.5 million investment for every 1-2 IPRs instituted— a steep price.  Especially considering that any IPR that moves forward is 2-3 years away from a CAFC decision. Moreover, any hedge fund is unlikely to have Article III standing to even participate in the CAFC appeal. I just don't see wild swings (even in a small cap stock) based upon this kind of track record and timeline.

If the current institution rate continues, these filings will dry up as the filings will be become non-events from a market perspective. 

Unfortunately, in the short term, the Bio/Pharma lobby will keep their favorite hedge fund, boogeyman.  The obvious fix for Congress is to add a standing requirement to IPR (currently proposed in some bills). Yet, such a control would cut off IPR as a due diligence tool to avoid litigation, which would be quite unfortunate for the vast majority of legitimate IPR filers.