Whether the Citron report is intentionally wrong for the purpose of causing PolarityTE stock to tumble, which it has, or whether it is recklessly wrong, or just ignorant is impossible to tell. But what Citron says can without question be characterized as absolutely incorrect.
Yesterday, Law360 published an article that gave unjustified credence to what in my opinion is an extraordinarily frivolous lawsuit against PolarityTE (NASDAQ: COOL), a commercial-stage biotechnology and regenerative biomaterials company located in Utah.
Unfortunately for Polarity, they have found themselves in the cross-hairs of Citron Research, who on their website proclaim that they have “amassed a track record identifying fraud and terminal business models second to none”. On June 25, 2018, Citron published a report on PolarityTE, charging the company with committing fraud relating to its patent prosecution endeavors. Citron is written and edited by Andrew Left, an activist short seller.
Citron does not allege, and could not credibly allege, that the PolarityTE has been lying to the United States Patent and Trademark Office. Nor did Citron allege subterfuge surround the technology or science underlying the patent application in question. Indeed, Citron specifically says in the report that they “will not discuss the science behind PolarityTE”. Instead, the astonishing claim is made that PolarityTE has committed fraud because it did not notify shareholders that the patent examiner issued a non-final rejection in a patent application.
The problem with the Citron report is it is completely wrong.
Clear Error in the Citron Report
First, it is blatantly obvious that Citron does not understand patent prosecution, or that they cannot properly read a file history, or that they are misrepresenting what the file history actually shows. For example, Citron says that the non-final rejection was made known to PolarityTE on March 31, 2017, which they find to be conclusive proof of fraud because PolarityTE closed a transaction with shareholders on April 7, 2017. The problem, however, is the non-final rejection was mailed by the USPTO and sent to the law firm representing PolarityTE on April 7, 2017. See Non-Final Rejection Dated April 7, 2018.
Assuming for a moment that the receipt of a non-final rejection is at all relevant – which it is not – there is no way it could have been received by the law firm representing PolarityTE until after the mailing date. Then there would have been at least several days, perhaps a week or several weeks between receipt and the law firm notifying the client.
It seems Citron flat out misunderstood the importance of the difference between the Transaction History and the Image File Wrapper in Public PAIR, conflating the dates the patent examiner worked on the First Office Action on the Merits – which necessarily had to be before it was finalized and transmitted to PolarityTE – and when the law firm representing PolarityTE received the non-final rejection (i.e., First Office Action on the Merits).
This same mistake was made by Citron with respect to the date of the final rejection. The USTPO sent the law firm representing PolarityTE the final rejection on June 14, 2018. Citron erroneously claims the final rejection was sent to PolarityTE on June 4, 2018, which is simply false. Again, it would have taken days, or weeks for the lawyers representing PolarityTE to notify the company that they had received this final rejection. See Final Rejection Dated June 14, 2018.
Alarming Unfamiliarity with Patent Prosecution
Aside from the obvious errors, the Citron report demonstrates an alarming unfamiliarity with the basics of patent prosecution. A non-final rejection in a patent application is commonplace. Indeed, if a first action allowance is obtained the patent applicant should ask the patent attorney why broader claims were not sought in the first place. So, to say or suggest that there is fraud, or even anything peculiar about a non-final rejection in a patent application is simply wrong.
The patent applicant has an absolute right to respond to a non-final rejection, can conduct a private interview with the patent examiner to discuss the application to attempt to resolve the rejection with mutually agreeable claim language, and can argue with the examiner both in person and in writing to attempt to convince the examiner that they are mistaken about either what the prior art says, or what the invention is, or both. Indeed, inventors spend many thousands of hours working on their inventions, patent attorneys will spend many dozens of hours reading the prior art and drafting the patent application that is filed, and patent examiners will spend several hours reviewing the application before issuing a First Office Action on the Merits (i.e., a non-final rejection). It is absolutely ordinary, and understandable, that the First Office Action on the Merits would ordinarily result in all claims being rejected. See Understanding U.S. Patent Prosecution.
Citron also claims that PolarityTE has engaged in fraud because they received a final rejection from the patent examiner and did not notify shareholders. Again, only those who are completely unfamiliar with patent practice and procedure could possibly make such an erroneous claim. A final rejection is anything but final in the everyday meaning of the word.
The name “final rejection” is a bit of a misnomer. Receiving a final rejection does not mean that a patent application has been completely and forever rejected by the USPTO and cannot be saved. Instead, a final rejection means a final six (6) month clock has started on the current patent application. See 35 U.S.C. § 133. Thus, time is winding down for the applicant on this filing once a final rejection is received. But even after a final rejection the applicant can still file an Amendment and Response, they can still ask for and receive an interview with the patent examiner, and they can and sometimes will still convince the patent examiner to issue a Notice of Allowance.
Even if the patent examiner cannot be persuaded after a final rejection the applicant still has MANY options. For example, a very common option is to file a Request for Continued Examination (RCE) pursuant to 37 C.F.R. 1.114. By doing this and paying a fee the applicant receives additional consideration from the patent examiner. And if Citron were at all familiar with patent practice they would know that many – if not most – patent examiners require a minimum of 3 or 4 written correspondences to be filed before they are prepared to issue a patent. That means a minimum of one RCE filing. Sometimes more RCEs are filed. And since by rule you can only file an RCE after prosecution is closed, the most typical RCE filing occurs AFTER there has been at least one final rejection, sometimes more than one final rejection.
So, had Citron been interested in getting the facts straight, they would have learned that many patents are issued after a final rejection. A great many.
Whether the Citron report is intentionally wrong for the purpose of causing PolarityTE stock to tumble, which it has, or whether it is recklessly wrong, or just ignorant is impossible to tell. But what Citron says can without question be characterized as absolutely incorrect. There is no shade of gray, or room for discussion. Citron is wrong.
Frankly, I see no way the attorneys bringing this case should be able to survive without being sanctioned. Either the diligence performed pre-lawsuit was very weak, or this is just a nuisance lawsuit that they will seek to settle for less than defense costs. Either way, any respectable attorney or firm should steer well clear of this nonsense. In opinion, this reeks of market manipulation.
Image Source: Deposit Photos.