One positive that came out of the recent debates in the Senate and House Judiciary Committees as they marked up their patent reform bills was general agreement that the inter partes review (IPR) process established by the America Invents Act is having serious unintended consequences. Rather than fulfilling its original intent of weeding out weak patents, IPR’s and the Patent Trial and Appeals Board (PTAB) have become “patent death squads” as they strike down 77% of the patent claims under review. The IPR process is being used to undermine confidence in the patent system. A recent article estimates the resulting cost to the U.S. economy as over $1 trillion.
As if that wasn’t bad enough, it didn’t take long for some who might be termed “IPR trolls” to devise nefarious new ways to abuse the system to attack innovative companies. The most famous instance is described in the Wall Street Journal op-ed Patent Death Squads vs. Innovation:
Some financiers have started using the PTAB to make a quick buck. Kyle Bass is a hedge-fund manager, not a pharmaceutical developer, but he recently challenged six drug patents. His strategy, which has been widely reported, is to bet that the challenges would drive down the patent owners’ stock prices.
The strategy is working. Early this year Mr. Bass challenged Acorda Therapeutics ’ patent on Ampyra, a medicine that uses a re-engineered bird poison to help multiple sclerosis patients walk. The claim: Medical experts would have been able to deduce the effectiveness and proper dosing of the re-engineered molecule. The challenge caused the company’s stock price to drop almost 10%.
If hedge funds and copycats continue to take advantage of the PTAB’s bias against patent holders, it will choke off funding for lifesaving medicines.
During the Senate Small Business and Entrepreneurship Committee’s patent reform hearing Chairman David Vitter (R-LA) uncovered another disturbing loophole that dishonest parties from around the world can exploit to attack patent owners precisely when they are most vulnerable. Because of a 2011 Court of Appeals for the Federal Circuit decision patent owners who have been victimized by fraudulent or deliberately misleading patent re-examinations or post grant reviews are now denied their historic right to sue for resulting damages. As a high burden was placed on the patent owner to prove their allegations in court, this right to sue for damages in such instances had not curtailed legitimate use of post grant reviews. Nevertheless, the Court held that a patent owner’s only source of redress in these cases was at the Patent and Trademark Office.
Soon after the ruling former Senator Birch Bayh (whose law firm engaged me to work with them on the issue) wrote to Director Kappos who confirmed that the PTO has no authority to award economic damages to patent owners victimized by deliberately abusive post grant reviews. Thus, those willing to violate their certification to the PTO that in seeking a post grant review they are doing so truthfully, and not for an improper purpose such as harassment of a patent owner, no longer have to fear being held financially accountable for damages they inflict. The PTO can sanction the attorney if they are responsible for such misconduct, but this is rarely done. Further, the attorney may not even be aware that a foreign document has been consciously mistranslated or a technical drawing altered to trigger a review.
As Sen. Bayh helped create patent re-examinations, he was particularly distressed to see such a serious threat to the post grant review system being established. The resulting “integrity loophole” is particularly threatening to innovative small businesses, university spin outs or independent inventors because they are relying on one or two key patents for market entry or to secure venture funding. Even if the patent is eventually upheld, considerable damage can still be inflicted on a fledgling company.
Having to defend their patent in post grant reviews such as an IPR can easily cost patent owners between $700,000 to over $1 million when the subject matter of the patent under challenge relates to the biological or pharmaceutical sciences, due in part to the need to cast a wide net for relevant prior art, according to experienced practitioners like Brad Olson, a partner with Barnes and Thornburg, LLP. Such expenses are particularly threatening to new companies finding the patents that drive their business under attack just as they are desperately trying to raise money for their very survival.
Given the track record of IPR’s as “patent death squads” potential investors or licensees can’t be blamed for waiting until the reviews are completed to finalize pending deals. These delays, added to the expense of defending patents in the IPR process, are potentially fatal blows to a small business. That such challenges could be initiated based on deliberate abuse of the system is particularly galling. The integrity loophole allows unscrupulous parties to put a bullseye on the patent dependent small companies our economy depends on without fear of retribution.
When Senator Vitter questioned David Winwood, Chief Business Development Officer at LSU’s Pennington Biomedical Research Center, about the seriousness of this problem, he replied:
While there may be areas of disagreement regarding patent reform, one area where everyone should agree is that we cannot tolerate fraud or deliberate abuse of patent reexaminations or post grant reviews. Patent applicants are held to a standard of honesty in dealing with the PTO or they risk losing their patent rights, so third-party requesters should be held to a similar standard.
Currently the patent owner must be truthful, but the third-party requester can commit fraud with no financial penalty due to a recent court decision. So the door is wide open for unscrupulous parties around the world to abuse our system knowing that it will take the patent owner years of effort and hundreds of thousands of dollars to defend their patent in the Patent and Trademark Office. This is time and money that small companies simply cannot afford and such challenges can deny them access to desperately needed venture funding or entry into the marketplace. We should restore the traditional right of patent owners to sue for damages in such cases. By restoring this historic right we will effectively close this integrity loophole from being used against the small companies which lead in the creation of U.S. products, jobs and even new industries.
Chairman Vitter asked Robert Schmidt (co-chair of the Small Business Technology Council and Board member of the National Small Business Association) if Congress should close the loophole:
Yes. This is every bit as important as solving the “troll problem.” For the last several years, Congress and the courts have chosen to focus on weakening patents to try and eliminate “trolls.” However, as the last 220+ years have proven, having a strong patent system has allowed America to develop an economy like no other. Recently, a number of court decisions and the America Invents Act have weakened patents, and our economy is suffering because of them. The purpose of any pending patent legislation should be to strengthen patents, not weaken them. The “integrity loophole” is one such example of weakened patents…
A 2012 empirical study published in the Columbia Science and Technology Law Review  found that one in four respondent practitioners reported some form of fraud or misconduct on the part of those challenging patents in reexamination.
We are now seeing a new variation of abuse of post grant reviews as hedge funds are publicizing their challenges in the media to important drug patents to profit when they short the company’s stock. Rachel King, a witness  at the referenced Senate Small Business hearing talked about this growing problem. For affected companies, there is no way they can ever recover the losses (which were about $150M to Acorda). Specifically we agree with others who suggest that liability attaches whenever the filer of an IPR (or CBM, PGR, or reexam) knowingly & willfully acts in a manner contrary to 37 C.F.R. 11.18 — the PTO’s own long-standing disciplinary rule, modeled on federal Rule 11. Proposed language would remedy the hedge fund abuse of IPR’s by giving the targeted companies a federal cause of action for damages. Among other things, this PTO rule requires that a petition for IPR (like any other paper filed before the PTO) “is not being presented for any improper purpose, such as to harass someone or to cause unnecessary delay or needless increase in the cost of any proceeding before the Office.”
Obviously, filing an IPR petition to drive down a company’s stock price is such an “improper purpose” and would open hedge funds to liability under our proposed language. At least one prominent post-grant practitioner has agreed that the hedge fund abuse of IPR’s is plainly an “improper use of the proceeding” but, as he points out here,  the most the PTO is currently empowered to do is award attorney’s fees — without the proposed remedy, the targeted companies will not be able to recover the damage done to their stock price and to their business as a result.
Former Federal Circuit Chief Judge Paul Michel has expressed his concerns  on the issue. It has been proposed by The Alliance to Prevent Fraudulent Attacks on Patents  that by restoring the patent owner’s historic right to sue for damages the loophole will be closed. The SBTC, and its parent organization, the NSBA, were among the first to endorse these efforts. The importance of closing the integrity loophole has previously been mentioned in NSBA’s “Patent Reform Newsletter.” 
Much has been made about the problem of patent trolls. Yet despite hundreds of millions of dollars and years of effort, during the last Senate hearing proponents would not even attempt to define the term when asked. However, we can accurately label as “IPR trolls” those who violate their oath to the PTO.
Let’s hope Congress uses the pending patent reform legislation to drag these bad actors out from under their bridges to be held financially accountable for the damage they inflict. That’s the best way to kill a troll. And it’s a sure way to strengthen the patent system.