It’s Time to Whack ‘IPR Trolls’

By Joseph Allen
June 22, 2015

Whack an IPR trollOne 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.

[Joe-Allen]

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 [1] 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 [2] 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, [3] 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 [4] on the issue. It has been proposed by The Alliance to Prevent Fraudulent Attacks on Patents [5] 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.” [6]

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.

______________

[1] http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2158395

[2] http://www.sbc.senate.gov/public/?a=Files.Serve&File_id=cf221704-8083-4230-ae5e-88b6ce8598f7

[3] http://patentspostgrant.com/why-hedge-fund-ptab-filings-will-fail

[4] http://ptolitigationcenter.com/2011/08/the-reexamination-center-executive-interview-chief-judge-paul-r-michel-part-1-of-3/

[5] http://www.apfap.org/about.html

[6] http://nsba.biz/leadershipcouncil/patent-reform-update/

The Author

Joseph Allen

Joseph Allen is a Featured Contributor on IPWatchdog.com, and a 30-year veteran of national efforts to foster public/private sector commercialization partnerships, and author of numerous articles on technology management for national publications.

Joe served as a Professional Staff Member on the U.S. Senate Judiciary Committee with former Senator Birch Bayh (D-IN), and was instrumental in working behind the scenes to ensure passage of the historic Bayh-Dole Act. He is our resident Bayh-Dole expert, and will write frequently about Bayh-Dole and issues surrounding the commercialization of university research.

In 2008, Joe founded Allen & Associates, through which he offers consulting services assisting clients in technology transfer issues, including developing effective communication strategies with national policy makers.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 25 Comments comments.

  1. EG June 22, 2015 10:31 am

    Joe,

    Thanks for the writing this article. That abusers of the IPR system can “game it” without incurring liability or other legal risk is unconscionable. Congress needs to stop focusing on the overblown (and misrepresented) “patent troll” issue and start focusing on abuses like you’ve noted that will cripple the ability of innovative small businesses and entrepreneurs to compete and create job growth in the US businesses.

  2. Anon June 22, 2015 10:56 am

    I am curious as to a related action – when was the response due to Ron Katznelson request for correction of the rather political White House “Troll” paper?

  3. Anon June 22, 2015 12:42 pm

    EG,

    I thought the story here, but found it quicker on the other blog: http://patentlyo.com/patent/2015/04/challenged-federal-information.html

  4. Anon June 22, 2015 12:51 pm

    (following up on my own lead, Ron submitted his request on March 30, of this year and expected a reply within 60 days.

    Today marks Day 84.

    Given that the current administration has set the record for being the most “non-open” administration ever, I am not really expecting an open and full response to Ron, but would it not be “nice” for some of the rhetoric to be cleared from the discussion as Congress continues to debate actions and changes to patent law?

  5. DM June 22, 2015 2:26 pm

    With so much financial incentive associated with miring patents in sham review requests that stock manipulation, investment destabilization, and business interference this problem won’t go away until congress acts to remove the enormous financial incentives.

  6. Moshe June 22, 2015 2:29 pm

    It seems like nobody has proposed fee-shifting for IPRs? If I own a patent and it survives a challenge unscathed, why shouldn’t the other side have to pay my attorney fees?

  7. Mr. V June 22, 2015 2:33 pm

    These “loop holes” and “abuses” serve as nothing more than further testament that this Congress doesn’t know what the hell they’re doing when it comes to Patents. While I am still somewhat ambivalent towards the AIA, it is no mystery that much of its impetus originated from MegaCorp and Multinational company lobbying efforts who have far more to gain under this current regime than do smaller start up companies. Now, nearly 4 years later, the systematic erosion of the United States Patent continues with a new species of (IPR) troll who’s evolution while inevitable, was all but considered by our Congressmen when they decided it would be a good idea to allow anyone with a trivial beef or quick buck to make to challenge a patent. We’ve gone from a presumption of validity to “preponderance of the evidence,” from constructing claims on the POSA standard to “broadest reasonable interpretation;” and from Standing to Kyle Bass.

    The new patent reforms this congress proposes will only further exacerbate this anti-patent disposition especially when considering the implications concerning heightened pleadings and whatever the hell they plan on doing with discovery requests. All this being done for the purpose of curtailing the “troll problem” when in reality it will be the start up companies left holding the bag of worthless patent rights.

    When does it end?

  8. Benny June 23, 2015 5:14 am

    According to the article, 77% of challenged patent claims don’t survive an IPR.
    Given the cost of prosecuting an IPR – say 300K – I wouldn’t begin the procedure unless I was more than 77% certain that I could present a rock-solid case for invalidation. That figure actually seems low, given the prerequisite that there should be adequate evidence that the patent under review does not meet the requirements for eligibility.

  9. Edward Heller June 23, 2015 8:06 am

    A simple fix would be to put the whole process under court supervision, like magistrates– one would have to file in a court which would make a determination of whether to refer the matter to the PTO for trial. This simple fix would impose a standing requirement on petitioners, and further solve multiple constitutional issues.

  10. Edward Heller June 23, 2015 8:08 am

    Further, since the court would make the final determination and issue the order to cancel the claims, the standard of proof would remain clear and convincing and claim construction would be standard court construction.

  11. Benny June 23, 2015 8:10 am

    Edward,
    Doesn’t your suggestion rely on the assumption that a court judge can actually read and understand the patent and prior art?

  12. Edward Heller June 23, 2015 8:19 am

    Benny, since I have seen many district court judges deal with patents, I am singularly impressed with their skill level and their dedication to their job.

    These judges usually conduct live hearings where experts may testify in open court. The court system is, from the ground up, a far better system than that engineered by the PTO.

    Also, claim construction can and should take place in court prior to a decision to refer. Court claim construction procedures are robust, to say the very least. Nothing of the sort takes place in the PTO, which by comparison, is hardly a court providing anyone due process.

  13. Benny June 23, 2015 8:26 am

    Edward,
    That being said, they are on the bottom left corner of the learning curve when handed a technical patent specification, wherreas USPTO personnel probably have greater technical background and experience (though often not even a small percentage of the applicants knowledge in the field).

  14. Edward Heller June 23, 2015 8:33 am

    Benny, I think you underestimate just how bad the procedures are in the patent office. Even a nontechnical but very well-educated district court judge can get a really good grasp of the particular technical issues involved in a case before having to make a decision. I would say that the bad procedures of the patent office versus the good procedures of court more to make up for the lack of ethical education by a district court judge.

    But the most important thing to consider is standing. Only those who have “case and controversy” standing can bring a petition for IPR. This would almost completely solve the problem of patent IPR trolls all by itself.

  15. Benny June 23, 2015 8:38 am

    Edward,
    You do mean “lack of technical education”, not “ethical education”, don’t you?
    If the USPTO wasn’t flawed we wouldn’t get to the IPRs – the ineligible patent applications would have been weeded out before grant.

  16. Anon June 23, 2015 9:46 am

    Mr. Heller,

    I think that you need to read the AIA once more if you think that IPR has the standing requirement of “case or controversy.”

    Or are you discussing a different IPR than the one on the books now?

  17. Curious June 23, 2015 12:19 pm

    If the USPTO wasn’t flawed we wouldn’t get to the IPRs – the ineligible patent applications would have been weeded out before grant.
    Actually, the USPTO’s incompetence cuts both ways — there are many applications that should get allowed but are not.

    The USPTO has a vested interest in knocking out patents (“see, we aren’t that bad after all, we can reject these patents — just give us a second chance”). I see (most) judges as less biased — although when you get a bad one, you can be screwed.

    If you’ve read enough decisions at the Board as I have, you’ll find a level of sloppy analysis and misstatement of the law and fact that simply astounds. I still crack up over the rash of Board decisions (see e.g., 11/950,473) a few years back that cited the phrase “Silence implies assent” from the Supreme Court case of Harper & Row v. National Enterprises, 471 U.S. 539 (1985), when Applicants didn’t file a Reply Brief or address a particular argument by the Examiner. For those that are curious, read the Supreme Court case and see how the phrase “Silence implies assent” is used — then try to figure out how any competent attorney could ever cite that phrase.

  18. Anon June 23, 2015 12:20 pm

    At the risk of “drawing fire” I will say that if these here IPR Trolls are acting in accord with the law as written by Congress, then I care very much that the appropriate vehicles for “whacking” them are put into play.

    For example, if filing of a lawsuit has as an effect the manipulation of the stock market in general – or of a particular company (here Celgene), but is otherwise sanctioned under law (AIA) and is not separately a violation of securities laws (or other laws), then it is the AIA itself that is to blame for opening up the path of such actions.

  19. The Truth June 23, 2015 1:39 pm

    If IPRs are truly a fair and efficient forum for only weeding out weak patents, then Pharma companies should have no problem withstanding them, and the market would quickly come to realize this.

    However, everyone knows that IPRs are not fair, but are an uneven playing field slanted against patentees. Pharma’s and Congress’ reaction to IPRs against pharma companies shows that they realize this, too!!

    The solution is to fix IPRs — not to leave them broken and simply let pharma buy an exclusion from Congress.

  20. Costs June 24, 2015 2:35 am

    Why does it take so much money (hundreds of thousands) to defend against the assertion? I mean, it just doesn’t seem like it should be that hard to essentially just “file a response” against a few new references or whatever if your patent is so great.

  21. Anon June 24, 2015 8:53 am

    Costs,

    You’ve never been involved in a legal matter, have you?

  22. Benny June 24, 2015 8:58 am

    Anon,
    old old lawyers joke – young attorney at pearly gates, arguing with St. Peter – St. Peter says, “we added up the hours you billed your clients and concluded you must be at least 104 years old”.
    That might partly answer Costs’ question.

  23. Anon June 24, 2015 11:29 am

    Benny, sorry – not seeing the connection.

    Can lawyers be a scurrilous bunch? Sure. Does that make this a patent issue? Not at all. If anything, all this does is reinforce the ideas that I have posted elsewhere that patent law is being hijacked to address systemic problems better addressed elsewhere (like in court reform, corporate structure law, or contract law). There needs to be a bigger picture view here and a critical questioning as to why patent law is being singled out. That larger view reveals a critical weakening of patent law – and the benefit of such happening to coincide with the those parties most pushing for patent law changes simply is not a coincidence.

    We are much like the city of Troy, celebrating the repulsion of forces at the gates by wheeling in a gift horse, we dare not look into the mouth of.

  24. Ron Katznelson June 25, 2015 3:25 am

    EG, Anon,
    I did get a response from the White House on the 60th day. It stated:
    “While our goal is to respond within 60 days to such requests, we will be unable to do so in this case due to the need to coordinate with other Executive Office of the President components that contributed to the report and blog post. OSTP is actively reviewing your request for correction and will respond as soon as possible”.
    I Will keep you posted as to any response or my next move.

  25. Anon June 25, 2015 6:46 am

    Thank you Ron,

    I wish you continued success in your efforts to protect the patent system, and appreciate those efforts to date.