In several related cases, the Patent Trial and Appeal Board (PTAB) recently ruled against patent owners who sought the denial of inter partes review (IPR) petitions as a sanction for alleged “abuses of process” by a third party petitioner, regardless of the petitions’ merits.1 The alleged abuses of process in these cases stemmed from a third party (the Coalition for Affordable Drugs) allegedly filing the IPRs in order to manipulate, and profit from, changes in the stock price of the patent holders (various pharmaceutical companies). So far, the PTAB has refused to find abuse of process in these cases and instead has based its decisions to implement or deny the petitions on the merits of the petitions themselves. The PTAB’s rulings suggest that challenging the institution of an IPR based on these types of abuse of process allegations may not be effective. Indeed, the PTAB declined to issue sanctions even after the USPTO unveiled proposed rule changes that appear to signal the agency’s interest in increasing the power of the PTAB to sanction parties and practitioners.
Inter Partes Review and Sanctions
The PTAB has discretion to institute or deny an IPR petition, and the decision to institute the petition is generally made on the merits of the IPR petition itself, i.e., whether or not the petitioner demonstrates “a reasonable likelihood that at least one of the claims challenged in the petition is unpatentable.”2 In principle, however, the PTAB has the authority to impose sanctions for abuse of process and other misconduct, including denying an otherwise meritorious IPR petition.3 Thus, even in situations where a petition is meritorious, a patent owner’s motion for sanctions based on an alleged “abuse of process” may, in theory, provide an independent basis for denying an IPR petition.
The USPTO’s New Proposed Rules
Further reinforcing the Board’s current ability to issue sanctions for abuse of process under 37 C.F.R. § 42.12, on August 20, 2015, the USPTO issued a new set of proposed rules comprising amendments to 37 C.F.R. § 42.11 that “further attempt to prevent any misuse of the AIA proceedings.”4 The amendments to 37 C.F.R. § 42.11 under the proposed rules extend the Board’s power to issue Rule 11-style sanctions to cover all papers filed with the PTAB and also to cover practitioners (currently only parties are subject to such sanctions).5 In addition, the proposed rules reassert that the current rules prohibit a party from presenting a petition for an IPR to the PTAB “for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of the proceeding.”6 Moreover, the proposed rules comment that the PTAB currently has “robust” authority to sanction a party for “abuse of process or any other improper use of the proceeding.”7
The Coalition for Affordable Drugs Cases
The issue of whether to deny IPR petitions based solely on an alleged abuse of process (as opposed to the merits of the petitions) has been central to many of the ongoing Coalition for Affordable Drugs (the “Coalition”) cases. Since February 2015, the Coalition has filed at least 33 IPRs in an attempt to invalidate numerous patents owned by various pharmaceutical companies. The Coalition is connected to hedge fund manager Kyle Bass, who has publicly pronounced his intent to invalidate certain pharmaceutical patents—ostensibly to clear a path for generic drug makers to produce pharmaceuticals at a lower cost to the public.8 At the same time, however, Mr. Bass’s hedge fund shorts the stock of the pharmaceutical companies that the Coalition targets.9In doing so, Mr. Bass and his hedge fund hope to profit if and when the companies’ share prices fall in response to the Coalition’s IPRs challenging and/or invalidating some or all of the claims of the companies’ pharmaceutical patents.10
In several of the Coalition cases, the PTAB requested and/or received briefing from the patent owners regarding the Coalition’s alleged abuses of process. For example, the patent owners in some of the cases made three types of arguments for finding abuse of process. First, some of the patent owners focused on the alleged improper profit motive underlying the Coalition’s IPR petitions.11 In response, the PTAB ruled that economic motivations do not themselves raise abuse of process issues, and neither does short-selling stock (the Board noted that short-selling stock is both legal and regulated).12 The PTAB further stated that profit is at the heart of every IPR and is not inherently improper.13
Second, some of the patent owners also alleged that the Coalition’s IPR filing was an “improper use” of the proceeding because of the combination of the Coalition’s profit motive and its lack of a competitive interest in the patents at issue.14 The PTAB rejected this reasoning too, stating that Article III standing is not a requirement for proceedings before the PTAB and that “Congress did not limit inter partes reviews to parties having a specific competitive interest in the technology covered by the patents.”15
Third, some of the patent owners argued that IPRs were created by Congress to offer a less costly alternative to litigation and that the Coalition’s petitions were outside the scope of congressional intent because the Coalition never had standing to file suit in district court concerning the patents at issue.16 According to the patent owners, the IPRs at issue were therefore not an alternative to any litigation and were thus improper and an abuse of process. The PTAB likewise rejected this argument and stressed that IPRs under the America Invents Act (AIA) were also “designed to encourage the filing of meritorious patentability challenges, by any person who is not the patent owner, in an effort to further improve patent quality.”17
Ultimately, in the cases cited above, the Board rejected all of the patent owners’ arguments that the IPRs are illegitimate as an abuse of process regardless of whether the underlying validity challenges have merit.18 Instead, consistent with its interpretation of a purpose of the AIA—to encourage the filing of meritorious patentability challenges—the PTAB denied the patent owners’ motions for sanctions for abuse of process, because the patent owners did not allege in their motions that the Coalition filed “non-meritorious patentability challenge[s] that amount to abuse.”19 In doing so, the Board appears to require patent owners to show, or at least allege, a lack of substantive merit as a precondition to finding abuse of process.
So far, none of the Coalition’s IPR petitions have been denied as a sanction for any alleged abuse of process. Rather, the PTAB has based its final decisions to institute certain of the Coalition’s IPRs and deny others based on the merits of the IPRs themselves.
The PTAB appears to reject the idea that abuse of process for filing an IPR petition can be found when the petition is meritorious. Therefore, under the current reasoning, one way for patent owners to successfully show abuse of process may be to show that the IPR filing, in some respect, lacks merit. Obtaining a sanction denying the petition in this manner may be of questionable value, however, because demonstrating that the petition lacks merit is itself sufficient for the PTAB to deny the petition—no sanctions are needed. Accordingly, other forms of sanctions may be more beneficial to patent owners upon showing abuse of process, such as an award of costs and attorney’s fees related to defending against the IPR.
What is clear is that the PTAB in at least some instances has rejected a petitioner’s profit motive, (legal) stock market activity, lack of standing in district court, and lack of competitive interest in the patents as bases for finding abuse of process. In addition, the Board issued decisions refusing to find abuse of process in a number of the Coalition cases while the USPTO was publicly strengthening the Board’s sanctioning power via the new proposed rules. Parties can therefore expect that the PTAB’s approach to abuse of process will remain unchanged if the proposed rules are adopted, absent new legislation or changes at the USPTO.