Patent challenging is a lucrative business for investment firms

Benjamin J Lehberger, St Onge Steward Johnston & Reens LLC, looks at patent challenges in the pharmaceutical industry and a recent trend of investment companies challenging the patents of foreign pharmaceutical manufacturers.

The 2011 America Invents Act brought several new options for challenging the validity of patents in the US. The most widely used option to date has been Inter Partes Review (IPR), which is a trial-like proceeding for challenging a patent on prior art grounds before the Patent Trial and Appeal Board (PTAB) in the US Patent Office. The new mechanism has drawn unexpected (and likely unintended) parties into patent challenges: speculators seeking to invalidate patents in order to affect the patent-holder’s stock price. Publicly traded companies in industries that rely heavily on patents to protect their markets are particularly vulnerable to this new challenge.

The Coalition for Affordable Drugs, backed by Hayman Capital Management LP, recently filed an IPR petition challenging US Patent No. 7,895,059 owned by Jazz Pharmaceuticals. The ‘059 patent is listed in the FDA’s Orange Book as one of the patents protecting Jazz’s successful narcolepsy drug, Xyrem. According to reports, Hayman Capital seeks to profit from the challenge by shorting the patent owner’s stock, ie, betting on the stock going down as a result of a patent protecting the Xyrem market being put at risk or ultimately invalidated.

Hayman Capital has indicated that it plans to target a number of companies in the pharmaceutical industry with IPR challenges. Since February, it has filed at least thirteen other IPR’s challenging patents protecting Acorda Therapeutics’ Ampyra, Shire’s Lialda, NPS Pharmaceuticals’ Gattex, Pharmacyclics’ Imbruvica, and Biogen’s Tecfidera, Celgene’s Revlimid, Pomalyst, and Thalomid. The strategy has seemed to work, at least in the short term, as Acorda’s stock fell nearly 10% immediately after their IPR challenge.

Hayman Capital is not the only investment firm filing IPR’s. Ferrum Ferro Capital, a New York based hedge fund, recently filed an IPR petition challenging an Allergan patent relating to its glaucoma drug, Combigan. This challenge comes after Sandoz was unsuccessful in invaliding the same patent in court leaving it blocked from entering the generic market. While the focus has so far been on the pharmaceutical industry, where the critical patents can be easily identified from the FDA’s Orange Book and the stakes are high, we could start to see similar challenges leveraged against publicly traded companies in other industries.

The number of IPR petitions filed in the US Patent Office has been on the increase since the procedure first became available at the end of 2012. 701 IPR petitions were filed in 2013 followed by 1501 in 2014. Unlike challenging a patent in a U.S. district court, there need not be any accusation or threat of patent infringement to initiate an IPR proceeding. This eases the requirements for potential infringers to challenge patents before any actual infringement occurs. Thus, in the pharmaceutical field, IPR’s can be an effective tool for generic drug companies to use not only after filing an Abbreviated New Drug Application (ANDA), but even before the ANDA filing or when there is otherwise no jurisdiction to bring the challenge in the district court. However, it opens the door for nearly anyone to attack the validity of a patent.

Challenging a patent with an IPR is generally cheaper and faster than in a district court, and may offer the challenger a greater chance of success. The cost of an IPR proceeding is generally in the hundreds of thousands (USD) rather than the millions (USD) which could be incurred in a district court litigation and, where a district court litigation may take several years, an IPR is generally resolved 12 months after being instituted. The PTAB only institutes a proceeding when it finds that there is a reasonable likelihood that at least one of the challenged claims is unpatentable, however the standard is met in approximately 75% of the petitions filed. In the IPR’s that have been instituted and decided thus far, 62% have resulted in all of the instituted claims being found unpatentable and another 21% resulted in a partial finding of unpatentability.

Increasing the chances of a patent being invalidated in an IPR is the fact that the PTAB gives the claims a broader interpretation than in district court, which potentially allows more prior art to read on the claims, and applies a lower standard in evaluating the evidence of unpatentability. One advantage for the patentee in an IPR is that, unlike in district court, there is an opportunity to amend the claims to avoid the prior art. However, the requirements to do so are stringent and, to date, only one motion to amend the claims has ever been granted by the PTAB.

What can a publicly traded company do to protect itself from losing its patent protection and stock value to an IPR attack? While you cannot prevent a third party from filing an IPR petition, it may be possible to lessen the impact on your business. The first line of defence is during the early stages of obtaining patent protection. As is typically done, obtaining a comprehensive patentability search of US and foreign patent documents and literature before filing helps to  identify and address any prior art that could be used to challenge the validity in the future.

Next, consider filing multiple patents (either at the time of initial filing or later as continuation or divisional applications), particularly when the product or process embodies more than one invention. An IPR challenge by a speculator can be most detrimental when a high grossing product is protected by a single vulnerable patent. The more patents and diverse claims you have covering the product and processes for manufacture and use, the less likely you are to lose all protection. For example, in the case of Jazz Pharmaceuticals, there are numerous other patents listed in the FDA’s Orange Book that would need to be overcome before a generic competitor could enter the market. During the life of the product, evaluate any improvements for the possibility of filing for additional patent protection.

If your company’s patent is the subject of an IPR petition, it is important to get started on a defence as soon as possible after receiving notice. The patentee has the option to file a preliminary response before the PTAB decides whether there is sufficient evidence for the proceeding to go forward. Once the proceeding is instituted, the patentee then has only three months to seek limited discovery from the petitioner and submit a full response to the petition including any arguments, evidence, and expert declarations to be used in defence of the patent. Thus, while the Board is considering whether to institute the IPR, time would be went spent by developing your defence, gathering evidence and retaining experts given the high probability (statistically) of the IPR proceeding being instituted.

Also consider early on whether there are any amendments that can be made to the claims to avoid the prior art cited in the petition. The patentee is only permitted one motion to amend as of right, and it must be filed no later than the filing of the patentee’s response (3 months after institution).

In summary, publicly traded companies should be especially aware of potential challenges to patents covering their high grossing products that materially impact their business. Ensure that you have the best patent protection from the outset and continue filing patents to cover improvements and changes as the product develops over time. Should you receive notice of an IPR petition filed against one of your patents, contact U.S. counsel immediately to begin preparing the best defense to maintain the patent, and your stock value.