xtock-shutterstock-com
xtock / Shutterstock.com
14 May 2015AmericasMarc Cavan and Phillip Kurs

New players on the patent chess board

The advent of inter partes review (IPR) proceedings under the America Invents Act (AIA) has introduced new players to the traditional patent litigation scene in the US. Among others, new entrants range from not-for-profits, with ideological motivations, to for-profit entities leveraging IPRs for financial gain.

One implication of the new world of IPRs is that patentees have lost a measure of control. Previously, a patentee could generally insulate a patent from a court challenge either by not threatening infringement or by structuring outreach in a way that did not trigger declaratory judgment standing. Such an approach appealed to patentees who lacked the resources to pursue a lawsuit or who wanted to ensure choice of venue.

Now, using IPR, challengers can be more proactive. While re-examination had previously been available as a tool for such third parties, IPR is generally viewed as a more powerful mechanism for challenging validity. Such challenges may be particularly relevant for life science companies, which often have long timelines to determine the commercial feasibility of a patent, but may face earlier patent challenges.

In US district courts, a challenger must demonstrate standing to bring a declaratory judgment suit under article III of the US Constitution.

That requirement generally precludes organisations that oppose a patent, but are not themselves at risk of facing a patent infringement lawsuit, from challenging the validity of the patent in court.

For example, the American Civil Liberties Union (ACLU), in its challenge of Myriad’s BRAC patents, could not directly challenge Myriad’s patents in a federal court (Association for Molecular Pathology v Myriad Genetics 2014).

Instead, the ACLU was forced to challenge the patent indirectly by representing a group of plaintiffs, including physician groups. And even then, many of the initial group of plaintiffs involved in the suit ultimately lacked standing, according to the US Court of Appeals for the Federal Circuit. In dismissing many of the challengers, the federal circuit explained:

“Simply disagreeing with the existence of a patent on isolated DNA sequences or even suffering an attenuated, non-proximate, effect from the existence of a patent does not meet the [US] Supreme Court’s requirement for an adverse legal controversy of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.”

IPRs, on the other hand, are not adjudicated by an article III court, so challengers, who may lack standing in district court, have nonetheless filed IPR patent challenges.

Broader independence

Questions of treatment affordability and debate over the propriety of certain life sciences patents have prompted not-for-profits to oppose certain patents. The ACLU did so in the aforementioned case against Myriad that was ultimately decided by the Supreme Court.

While not-for-profits could participate in patent challenges indirectly (as the ACLU did), the new ability of groups to challenge patents directly in IPR increases the likelihood of additional challenges.

IPRs have freed up not-for-profits from finding parties with article III standing, arguably affording broader independence in directing challenges. IPRs are generally also significantly less expensive than district court litigation.

Unique IPR estoppel rules also have the potential to generate alternative funding sources for not-for-profits. According to Title 35, Section 315 of the US Code, a party to an IPR is estopped from raising issues “on any ground that the petitioner raised or reasonably could have raised during that IPR” in future actions in court or before the International Trade Commission.

That requirement applies to “the real party in interest or privy of the petitioner” While it remains to be determined how narrowly or broadly the “real party in interest” requirement and the definition of “privy” will be applied—which will likely turn on the facts and circumstances of a particular case—the rules framework seems to invite the possibility of a company wishing to invalidate a patent, but hoping to avoid estoppel, of donating to an independent non-profit that might separately seek to challenge such a patent.

For-profit companies may also seek to profit from IPRs by ‘betting’ against a target. As has been widely reported, one hedge fund, Hayman Capital Management, has apparently attempted to profit from IPRs by shorting target companies’ stock and filing IPRs.

For example, Hayman’s manager Kyle Bass—who started an organisation called the Coalition for Affordable Drugs—filed an IPR against a Jazz Pharmaceuticals patent related to Jazz’s narcolepsy drug Xyrem (sodium oxybate).

Jazz’s 2012 annual report discloses information consistent with the hypothesis that Hayman may have thought a successful challenge to patents preventing companies from selling a generic version of Xyrem would negatively impact Jazz’s stock price: “Xyrem is our largest selling product, and our inability to maintain or increase sales of Xyrem would have a material adverse effect . . . .  If generic products that compete with Xyrem are approved and launched, sales of Xyrem would be adversely affected,” the report said.

According to The Wall Street Journal, Hayman said the coalition would not be settling the case. But—as has been suggested of certain other filers—a third party seeking to profit from an IPR might also file in hopes of extracting a settlement. Such an approach could also make targets of companies that are not publicly traded.

The future trends in third party use of IPR will likely depend on ongoing assessments of the attractiveness of the system and the likelihood of success of such third party challenges. The US Patent and Trademark Office’s interpretation of the “real party in interest” and “privy” rules will also have an impact.

While much has been written about the AIA and IPRs, and the new framework for patent challenges has significantly affected trends in the US patent system, the framework is still relatively new (and evolving), and new players and strategies will continue to emerge.

Marc Cavan is a patent litigation partner in  Ropes & Gray’s Chicago office. He can be contacted at: Marc.Cavan@ropesgray.com

Phillip Kurs is a patent litigation associate in  Ropes & Gray’s Silicon Valley office. He can be reached at: Phillip.Kurs@ropesgray.com