16 June 2015

The unintended consequences of IPR

Sometimes, a good tool can find itself in the wrong hands.

In September 2012, the America Invents Act (AIA) introduced the inter partes review (IPR), a quicker, more cost-effective way of challenging patents on the basis of prior art consisting of patents or printed publications.

The AIA patent reform was squarely aimed at curbing the activities of non-practising entities (NPEs), also known as ‘patent trolls’, which had made life unpredictable for innovators in the tech industry.

The IPR, and its post-grant review counterpart, gave innovator companies a way of cheaply defending themselves against NPEs that assert their (often dubious) patents against them.

Where traditional proceedings for invalidating patents can take years, racking up millions in costs, the IPR takes up to just 18 months and costs about $300,000, according to a Wall Street Journal report in April.

The IPR has also had a part to play in the life sciences sector, but there are complications. For example, hedge fund manager Kyle Bass has drawn criticism for employing the IPR as a weapon against certain drug patents, so is it changing things for the better?

Early outcomes

Fangli Chen, a partner at Choate Hall & Stewart in Boston, said that based on early data, for the most part the IPR has benefited companies targeted by NPEs.

“A significant percentage of IPRs filed are in connection with patent troll litigations and once an IPR is instituted, more than 80% of co-pending litigations are stayed,” she says.

“However, IPR is being increasingly used by business competitors to knock out each other’s patents that protect actual products.”

Dorothy Whelan, co-chair of the post-grant practice group at Fish & Richardson and a principal in the law firm’s Minneapolis office, explains that initially it was the tech industry that primarily benefited from the introduction of the IPR.

So how is the IPR serving pharmaceutical and biotechnology companies? According to a Bloomberg BNA report written by law firm Ropes & Gray, since post-grant review proceedings became available, only 8% of IPR petitions filed have involved biotech or pharma-related patents.

Chen and Whelan both say this figure is to be expected.

“The role of patents, and how these patents are challenged, is different in biopharma and biotech compared to the tech industry,” Whelan says.

She adds that while Hatch-Waxman litigation is typically the process for judging patents’ validity, the number of biotech and biopharma-based IPR challenges has been steadily increasing.

Chen says the number is low because there is less activity from NPEs in the life sciences industry.

“Between business competitors in the life sciences industry, companies are understandably cautious about IPR in the beginning because any IPR proceeding creates estoppel, which bars a challenger from raising any issue that the challenger ‘raised or reasonably could have raised’ in a future litigation,” she says.

“Biotech and pharma companies are used to well-established traditional litigation proceedings, such as Hatch-Waxman litigations, to resolve patent disputes and naturally would not want to risk any potential litigation options by jumping into IPR before they understand how IPR works.”

Whelan notes an increase in the number of IPR petitions filed by generic manufacturers, particularly against patents directed towards formulations and methods of use.

“I expect the number to increase even further as multiple drug manufacturers begin to target biosimilars patents,” she adds.

A death squad?

Randall Rader, former chief judge at the US Court of Appeals for the Federal Circuit, has been reported as calling the IPR proceedings a “death squad” for patents. The process certainly appears to be petitioner-friendly.

"Of the 183 petitions filed against pharma- and biotech-related patents that eventually went to trial, the Patent Trial and Appeal Board invalidated 42% of the claims."

Earlier this year, law firm Fitzpatrick, Cella, Harper & Scinto published a report detailing the survival rates of patent claims challenged under the IPR. It found that across all industries in the year 2014, 73.5% of claims challenged in IPR petitions were cancelled or found unpatentable.

However, Fitzpatrick wrote in the report that “while 73.5% is a significant rate of invalidation, it is not quite a ‘death squad’, particularly in view of rates of invalidation in district court cases and the number of claims cancelled by the patent owners”.

Chen says the 73.5% figure gives the perception that it is quick and easy to kill patents in the IPR proceedings, and “would encourage one to utilise IPR to knock out commercially valuable patents that are critical to protecting a company’s investment in its product”.

“In the life sciences sector, we have seen many petitions denied outright,” Whelan adds.

“The message for challengers of life sciences patents is that they have to take great care in crafting their petitions to make sure they are thoroughly supported.”

The Bloomberg BNA report says that of the 183 petitions filed against pharma- and biotech-related patents that eventually went to trial, the Patent Trial and Appeal Board (PTAB) invalidated 42% of the claims.

Chen warns that it is far more likely that commercially significant patents are challenged under the IPR.

“Indeed, the rapid pace, lower cost and petitioner-friendly legal framework of IPR would encourage challengers to go directly after high quality life sciences patents,” she says.

A new breed of troll

According to Whelan, the IPR has proved to be a useful tool for tech companies defending against patents asserted by NPEs. However, there are fears that the IPR has created an environment of ‘reverse trolling’, where entities attempt to invalidate often high value biotech or pharma patents.

Over the last few months, hedge fund manager Kyle Bass has filed IPR petitions in an effort to invalidate patents covering drugs made by companies including Celgene, Shire and Acorda Therapeutics.

The drugs targeted tend to be flagship products for their makers, with Acorda’s Ampyra (dalfampridine), a therapy to improve walking in multiple sclerosis patients, making $366.2 million in 2014 and Jazz Pharmaceuticals’s narcolepsy drug Xyrem (sodium oxybate) taking $778.6 million.

Pharmacyclics’s mantle cell lymphoma treatment Imbruvica (ibrutinib), another drug challenged by Bass, is predicted by the company to make more than $1 billion this year.

Bass filed the petitions through his Coalition for Affordable Drugs outfit, the objective of which, he says, is to drive down drug prices. But Jim Greenwood, chief executive of the Biotechnology Industry Organization, accused Bass of abusing the US patent system and “exploiting the US Patent and Trademark Office’s (USPTO) patent challenge proceeding as part of his cynical short-selling strategy against innovative biotech companies”.

Whelan notes that NPEs in the life sciences sector operate differently from those in the tech industry, where they acquire patents and then sue multiple companies with the objective of extracting a financial settlement, she says. Many of the targeted companies will begin filing IPR petitions to defend themselves.

“In the life sciences sector, what we have seen is trolls who attack patents by filing IPR petitions against patents held by pharmaceutical companies with the objective of depressing stock prices and/or extracting a financial settlement,” she says.

Chen says that the IPR has been misused, based on its unusually high winning rate for petitioners, but that it is too early to say that IPRs have created a ‘reverse trolling’ culture. However, she adds, there have been efforts to restore the balance in IPR proceedings.

Restoring the balance

It’s been nearly three years since the IPR was introduced. Patterns of litigation in those years have provided a sense of how the IPR system can be tweaked so that it can benefit the parties it was intended to, and the US government is now taking action.

“New legislation has been introduced in both the House of Representatives and the Senate to modify IPR proceedings to make it harder to invalidate patents,” Chen says.

She adds that in the next few months, the USPTO will roll out new rules that lower the requirements for patent owners to amend claims during IPR proceedings.

“This will significantly improve patent owners’ chances of surviving IPR,” she says.

The federal circuit is also due to decide a series of appeals filed from the PTAB’s decisions, which Chen says could have a significant impact on IPR proceedings.

“I am optimistic that the pendulum will start to swing back in favour of patent owners,” she says.

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