Defendants, Non-Profits, Defensive Aggregators And Hedge Funds: Common And Less Common Uses Of Inter Partes Review

By Rich Hung & Alex Hadduck

Introduction

Inter partes review (“IPR”) proceedings were originally intended to allow defendants in patent infringement lawsuits to invalidate questionable patents cheaply and quickly. But these proceedings increasingly are being used by parties that are not defendants in active litigation matters at all.

For example, non-profit entities have filed IPR petitions against non-practicing entities (“NPEs”) to invalidate patents, in their view performing a public service. For-profit entities have filed IPR petitions to protect their paying members, who have been sued or might be sued in the future. And at the far end of the for-profit extreme, hedge funds have filed IPR petitions that may allow them to profit from the resulting hit to the patentholder’s stock prices — or from the company’s willingness to settle in order to terminate the IPR proceedings to protect its patented monopoly.

This article examines these common and less common uses of IPR proceedings. It also canvasses pending legislation and procedural tools that parties have employed to respond to these strategies.

1. The Most Common Use Of IPRs: Related District Court Litigation

Congress created the IPR procedures as part of the 2011 America Invents Act. The original purpose of these proceedings was to provide a quick and efficient avenue for defendants in patent infringement lawsuits to challenge questionable patents[1] — particularly those posing a high nuisance value to companies.[2]

Unlike a typical district court patent infringement case, which can take several years to conclude (at great expense to all parties), the final written decision in IPR proceedings statutorily must issue no more than twelve months after the PTO decides to institute review, absent an extension for good cause.[3] IPR proceedings require only an oral hearing, not a full-blown trial.[4]

On the eve of its three year anniversary, the IPR system has more than fulfilled this original purpose. Most IPR petitioners are defendants involved in concurrent infringement litigation.[5] The PTO’s Patent Trial and Appeal Board (“PTAB”) granted 87% of IPR petitions in the first year that IPR proceedings were available and 76% of such petitions in their second year of availability.[6] Institution rates appear to vary by industry, however, with only 37.7% (or 69 out of 183) of life sciences-related petitions granted.[7]

The mere grant of an IPR petition may benefit defendants in district court cases. Since the new IPR system went into effect defendants have obtained stays of related district court proceedings 62% of the time.[8]

IPR proceedings also have proven to be as an extremely effective weapon for defendants when ultimately concluded — if decreasingly so over time. [9] As of March 2014, the overall claim cancellation rate was 96.4%. At the 30 month mark one year later, however, the overall claim cancellation rate had declined to 80.9% of claims adjudicated.[10] Life sciences patents have fared better in IPR proceedings, with only 42% of claims invalidated.[11]

1. Less Direct Uses of IPRs

Although patent litigation defendants have brought most IPR petitions, they have not been alone in using these new procedures. Both non-profit and for-profit organizations have initiated IPR proceedings to benefit (in their view) the public, their membership, or themselves.

The Electronic Frontier Foundation (“EFF”), for example, is a San Francisco-based non-profit with the stated purpose of “defending civil liberties in the digital world.”[12] In April 2015, EFF successfully invoked IPR proceedings to invalidate several claims of a patent that was being asserted against the podcasting community.[13]

For-profit organizations also have raised IPR challenges, even though not themselves the subject of patent lawsuits or assertions. The three best examples of organizations availing themselves of IPR proceedings to benefit their client base are Unified Patents Inc., RPX Corp., and Iron Dome LLC.

The first organization, Unified Patents, counts 90+ companies among its members, including Google Inc. and NetApp Inc.[14] Unified Patents’ stated purpose is to “proactively deter NPE activity” in five “Zones,” or technological areas.[15] Companies can join a Zone by pledging to notify Unified Patents before selling a patent to a NPE or by paying a membership fee.[16] Unified Patents devotes its subscription fees to activities designed to deter NPE activity within a given Zone, such as purchasing patents before they can be acquired by an NPE or filing IPR petitions against patents that it believes should not have issued.[17]

The second organization, RPX Corp., provides “defensive patent acquisition” services.[18] A publicly-traded corporation (NASDAQ: RPXC), [19] RPX boasts a membership roster of 220+ members.[20] Using its members’ annual fees for funding, RPX preemptively acquires or obtains licenses to patents for its members.[21] Like Unified Patents, RPX also will “periodically file inter partes reviews . . . or conduct a prior art search to confirm the value of a given patent or portfolio.”[22]

The final company, Iron Dome, is the more aggressive cousin of Unified Patents and RPX. Styling itself as a “patent interceptor,”[23] Iron Dome solicits paying members, but takes a different approach to protecting its members from NPE assertions. When a member is sued, Iron Dome investigates the asserted patents and “collateral patents” (i.e., other patents that the NPE owns and is asserting against others).[24] If the NPE refuses to dismiss the lawsuit against the defendant, Iron Dome initiates IPR proceedings against one or more of these patents.[25] Iron Dome also allegedly demands transferable licenses from NPEs — presumably so it can sell those licenses to other entities at risk of an infringement suit.[26]

Unified Patents, RPX, and Iron Dome have successfully instituted IPR proceedings against multiple NPEs. For example, a target of Unified Patents’ almost two dozen IPR petitions[27] includes NPE Dragon Intellectual Property.[28] The PTAB granted Unified Patent’s petition over Dragon IP’s arguments that Unified Patents was merely a nominal plaintiff for its members, and thus not the real party in interest.[29] The PTAB reasoned that Unified Patents had made an independent decision to file for IPR and that no particular members were in control of its filing decisions.[30] The PTAB also granted Iron Dome’s petition against NPE CRFD Research, Inc. this April.[31]

But these companies have not been uniformly successful. The PTAB denied Unified Patent’s separate petition against CFRD this year, determining that Unified Patents had failed to demonstrate a reasonable likelihood that at least one challenged claim was unpatentable.[32] Last summer, RPX was not successful in initiating IPR proceedings against another NPE, VirnetX Inc.[33] The PTAB denied RPX’s petitions as time-barred, determining that a member’s influence over its decision to file the petition rendered it a nominal plaintiff and not the real party in interest.[34]

Although the non-defendant entities above employ different strategies, they share a common trait: they serve their members (whether the public or paying members) indirectly, by attempting to eliminate or reduce the “tax” that NPE’s assertions of allegedly questionable patents impose.

• Pure Profit Exploitations of IPRs?

Most recently, a third category of IPR petitioner has emerged: for-profit entities that seek to initiate IPRs for their own direct commercial gain. Perhaps the best example of this is the Coalition for Affordable Drugs, a wholly-owned subsidiary of Hayman Capital, a hedge fund.[35] The Coalition has filed sixteen IPR petitions in the biopharma sector in the last five months.[36]

In the biotechnology and pharmaceutical space, a few key patents can drive a huge portion of a company’s revenues.[37] A facially-meritorious IPR petition therefore can have a dramatic effect on stock prices.[38] By taking a short position on a patentee’s stock before filing an IPR petition, a petitioner can potentially profit from any resulting dip in the patentee’s stock value.[39] The cost of pursuing this strategy may be negligible in comparison to the potential short-seller’s gain. This is because an IPR petition can cost as little as $23,000 to prepare and file and $200,000-300,000 to see through to a final decision.[40] A strategy that combines short-selling a stock and then filing an IPR petition thus has the potential to yield a very high return on investment.[41]

The Coalition appears to be pursuing precisely this strategy via multiple IPR filings. Its creator, Kyle Bass, has publicly acknowledged that it has filed IPR petitions to benefit Hayman Capital.[42] In the wake of two of the Coalition’s IPR petitions, publicly-traded corporations Acorda Therapeutics and Shire PLC saw their stock prices drop 7.6% and 5.2%, respectively.[43]

The Coalition’s strategy has drawn criticism from several sectors, including the biotechnology and pharmaceutical industries, unsurprisingly.[44] These industries have denounced the Coalition’s IPR strategy as inconsistent with the AIA’s purpose, as a misuse of the PTO’s scarce resources, and as abuse of the system. [45] In response, Bass has argued that the Coalition’s IPRs are fully in line with Congress’s desire to allow the quick invalidation of allegedly questionable patents. [46] In particular, Bass argues that the Coalition seeks to invalidate bad pharmaceutical patents that improperly promote higher drug prices.[47]

Other venture capital funds, such as Ferrum Ferro Capital (“FFC”), apparently are pursuing similar strategies. In March of this year, FFC filed an IPR petition challenging a patent covering Allergan’s glaucoma treatment, Combigan.[48] Like Bass, FFC has insisted that its petition is motivated by its desire to invalidate a bad pharmaceutical patent.[49] But FFC also has been vocal about its IPR monetization strategy.[50] In a lawsuit filed on June 19, 2015, Allergan characterized FFC’s IPR petition as “clearly a sham” aimed at forcing Allergan into a settlement.[51]

1. Proposed Legislation to Counteract Indirect IPR Uses

Despite Bass’s insistence that the Coalition pursues legitimate purposes, its petitions have already inspired several pieces of proposed legislation to prevent or discourage such uses of IPR proceedings.

First, a proposed amendment to the Innovation Act of 2015 would preclude a party from initiating IPR proceedings unless it certifies that: (1) it does not own a financial instrument designed to profit from a decrease in the patentee’s stock value; and (2) it has not demanded payment from the patentee in exchange for foregoing an IPR unless the party has been sued for patent infringement.[52] These provisions would specifically preclude the Coalition and Iron Dome’s apparent strategies. The Coalition would be able to file IPRs, but could not benefit from prior short-selling. As for Iron Dome, it could not insist on a transferable license in exchange for agreeing not to file an IPR petition.

Second, the proposed “STRONG” (Support Technology and Research for Our Nation’s Growth) Patents Act would restrict IPR petitioners to parties sued for infringement or who possess standing to bring a declaratory judgment action.[53] This would prevent entities with no direct relationship to a current or brewing patent dispute, such as Unified Patents, RPX, Iron Dome, and the Coalition, from filing IPR petitions.[54]

Finally, both the proposed STRONG Patents Act and the proposed Innovation Act of 2015 have provisions aimed at making it more difficult to invalidate patent claims.[55] Both pieces of proposed legislation would require that patents be construed under the same standards applied during district court litigation, and not the “broadest reasonable construction” standard applied during original prosecution before the PTO.[56]

1. Potential Procedural Attacks

While the debate over legislative curbs on indirect/commercial IPR strategies continues, interested parties have pursued several adversarial and procedural solutions. For example, patentees have filed suit to try to bar companies from pursuing an IPR petition for the purpose of commercial gain. For example, last year, NPE Chinook Licensing DE LLC unsuccessfully sued Iron Dome for racketeering, mail fraud, wire fraud, and extortion.[57] Allergan also recently sued FFC, alleging civil extortion, unfair competition, and malicious prosecution.[58]

Patent owners also have argued that an IPR petition should be dismissed as an “abuse of process” under 37 CFR § 42.12(a)(6).[59] In June, the PTAB authorized Celgene, a patentee, to file a motion to dismiss an IPR petition filed by the Coalition on precisely these grounds.[60]

The PTAB’s decision to authorize Celgene’s motion may signal the PTO’s willingness to police commercially opportunistic IPR petitions on its own — without legislative assistance.[61] 35 U.S.C. § 326(b) provides the PTAB with rulemaking authority to guard against petitions that undermine the integrity of the patent system and that tax the PTO’s resources.[62] Although the PTO has not publicly pursued rulemaking to respond or address these indirect and commercial IPR strategies, it may eventually do so.

Moreover, whether to institute IPR proceedings (or not) is unappealable under 35 U.S.C. § 314(d). The PTAB therefore may simply elect to deny IPR petitions that it views as abusive. [63]

Conclusion

Richard Hung,
Photo ©John Swanda 2013

As former Federal Circuit Chief Judge Randall Rader previously remarked, IPR proceedings have acted as a “death squad” for the majority of claims brought before the PTAB.[64] For this reason, litigation defendants, non-profit entities, for-profit membership-based organizations, and now even hedge and venture funds have increasingly availed themselves of these proceedings. The coming year will show whether, and to what extent, Congress, the judiciary, and the PTO will limit indirect and commercially opportunistic filings by non-litigation defendants.

Rich Hung is San Francisco-based intellectual property partner and deputy chair of Morrison & Foerster’s Intellectual Property Litigation Group and co-chair of its Inter Partes Review and Post Grant practice. Co-author

Alex Hadduck is a summer associate at Morrison & Foerster.

[1] Joseph Casino, Trends from 2 Years of AIA Post-Grant Proceedings, Law360 (Sept. 29, 2014, 10:06 AM), https://www.law360.com/articles/581512/trends-from-2-years-of-aia-post-grant-proceedings.

[2] Id.; Gene Quinn, Patent Abuse or Genius? Is Kyle Bass Abusing the Patent System?, IPWatchdog (Apr. 8, 2015), http://www.ipwatchdog.com/2015/04/08/is-kyle-bass-abusing-the-patent-system/id=56613/; Joseph Walker & Rob Copeland, New Hedge Fund Strategy: Dispute the Patent, Short the Stock, Wall Street Journal (Apr. 7, 2015, 7:24 PM), http://www.wsj.com/articles/hedge-fund-manager-kyle-bass-challenges-jazz-pharmaceuticals-patent-1428417408.

[3] 35 U.S.C. § 316(a)(11). The PTO may extend this one year deadline by up to six months for good cause. Id.

[4] § 316(a)(10).

[5] Casino, supra note 1.

[6] Id.

[7] Karen Mangasarian, James F. Haley, & Adam Stenmetz, Lessons Learned from IPR Proceedings in the Life Sciences, 89 PTCJ 829, 829 (Jan. 30, 2015). Defendants appear to be filing IPR petitions less frequently in the life sciences space, with only 8% of all IPR petitions directed to the biotechnology/pharmaceutical industry. Id.

[8] 30 Months of IPR Practice – By the Numbers, IPR-PGR (Apr. 20, 2015), http://ipr-pgr.com/30-months-of-ipr-practice-by-the-numbers/.

[9] Id.

[10] Id.

[11] Mangasarian et al., supra note 7, at 829.

[12] About EFF, Electronic Frontier Foundation, https://www.eff.org/about (last visited July 1, 2015).

[13] Final Written Decision at 28-29, Electronic Frontier Foundation v. Personal Audio, LLC, IPR2014-00070, Paper 41 (Apr. 10, 2014); Michael Loney, EFF Succeeds in Podcasting Patent IPR Proceedings at the PTAB, Managing Intellectual Property (April 10, 2015), http://www.managingip.com/Article/3444017/EFF-succeeds-in-podcasting-patent-IPR-proceeding-at-the-PTAB.html.

[14] Erin Coe, Unified Patents Adds AIA Reviews to Anti-‘Troll’ Arsenal, Law360 (June 23, 2015, 2:07PM), http://www.law360.com/articles/668619/unified-patents-adds-aia-reviews-to-anti-troll-arsenal.

[15] Toyota and Honda Join Unified Patents’ New Automotive Zone, UnifiedPatents (June 9, 2015), http://unifiedpatents.com/toyota-and-honda-join-unified-patents-new-automotive-zone/. The Zones are Wireless, Cloud Storage, Content Delivery, Electronic Payments, and Automotive. Id.

[16] Membership, UnifiedPatents, http://unifiedpatents.justdemo.org/#pricing (last visited July 1, 2015).

[17] Frequently Asked Questions, UnifiedPatents, http://unifiedpatents.justdemo.org/faq (last visited July 1, 2015).

[18] Defensive Acquisitions, RPX, http://www.rpxcorp.com/rpx-services/rpx-defensive-patent-acquisitions/ (last visited July 6, 2015).

[19] Stock Information, RPX, http://ir.rpxcorp.com/stockquote.cfm (last visited July 1, 2015).

[20] The RPX Network, RPX, http://www.rpxcorp.com/rpx-network/ (last visited July 1, 2015).

[21] RPX Solution, RPX, http://www.rpxcorp.com/network/rpx-solution/ (last visited July 1, 2015).

[22] Sticks and Stones, RPX (May 22, 2014), http://www.rpxcorp.com/tag/npe-costs/.

[23] What We Do, IronDome, http://www.irondome.com/#what-we-do/cee5/ (last visited July 1, 2015).

[24] Id.

[25] Id.

[26] Matt Chiappardi, RICO Claims Against ‘Patent Interceptor’ Tossed by Judge, Law360 (December 18, 2014, 7:21 PM), http://www.law360.com/articles/605256/rico-claims-against-patent-interceptor-tossed-by-judge.

[27] IPR petitions filed by Unified Patents available at PTAB Trials, https://ptabtrials.uspto.gov/; Coe, supra note 14.

[28] Coe, supra note 14.

[29] Scott Graham, Unified Patents Clears PTAB Hurdle, The Recorder (Feb. 19, 2015), http://www.therecorder.com/id=1202718419532/Unified-Patents-Clears-PTAB-Hurdle?slreturn=20150523161930.

[30] Institution Decision at 10-13, 23-24, Unified Patents, Inc., v. Dragon Intellectual Property, LLC, IPR2014-01252, Paper 37 (Feb. 12, 2015); see also Graham, supra note 29.

[31] Institution Decision at 22, Iron Dome LLC, v. CRFD Research, Inc., IPR2015-00055, Paper 10 (Apr. 27, 2015); Press Releases, IronDome, http://www.irondome.com/#!iprs-filed/c1w94 (last visited July 2, 2015).

[32] Institution Decision at 17, Unified Patents, Inc. v. CRFD Research, Inc., IPR2015-00157, Paper 8 (Apr. 30, 2015); USPTO Denies Unified Patents Petition for Inter Partes Review of CRFD Research Patent, IPFrontline (May 8, 2015), http://ipfrontline.com/2015/05/marathon-patent-group-announces-that-the-uspto-has-denied-unified-patents-inc-petition-for-inter-partes-review-of-crfd-research-inc-233-patent/.

[33] Christopher Blaszkowski, A Definition for IPR ‘Real Party-In-Interest’, Law360 (June 20, 2014, 4:24 PM), http://www.law360.com/articles/548079/a-definition-for-ipr-real-party-in-interest.

[34] Id.

[35] Ryan Davis, Hedge Fund’s AIA Attack Should Have Biotech Cos. Wary, Law360 (Mar. 9, 2015, 2:16 PM), http://www.law360.com/articles/628691.

[36] IPR petitions filed by the Coalition in 2015 available at PTAB Trials, https://ptabtrials.uspto.gov/.

[37] Quinn, supra note 2.

[38] Davis, supra note 35.

[39] Id.

[40] Id.

[41] Walker & Copeland, supra note 2.

[42] Id.

[43] The percentage change is based on the stock values the day before and after the IPR petition was filed. The PTO has yet to rule on any of the Coalition’s petitions. Maria Luisa Palmese & Eric Paul Greenwald, Financier’s Short-and-Petitions Strategy Targets More Drugs: Nine and Counting, IPR Blog (April 29, 2015), http://interpartesreviewblog.com/financiers-short-and-petition-strategy-targets-more-drugs-nine-and-counting/; Lisa Shuchman, Big Pharma: Let’s Shift Patent Debate Away From Trolls, Corporate Counsel (May 20, 2015), http://www.corpcounsel.com/id=1202726911929/Big-Pharma-Lets-Shift-Patent-Debate-Away-From-Trolls.?slreturn=20150523170606; stock price data available at Google Finance, https://www.google.com/finance; IPR petition filing dates and status available at PTAB Trials, https://ptabtrials.uspto.gov/.

[44] Id.

[45] Id.

[46] Ryan Davis, Hedge Fund Hits ‘Ridiculous’ Horizon Patent With AIA Review, Law360 (May 22, 2015, 5:40 PM), https://www.law360.com/articles/659301/hedge-fund-hits-ridiculous-horizon-patent-with-aia-review?article_related_content=1.

[47] Id.

[48] Petition for Inter Partes Review at 2, Ferrum Ferro Capital, LLC v. Allergan Sales, LLC, IPR2015-00858, Paper 1 (March 9, 2015); John T. Aquino, Allergan Sues over Investment Firm’s IPR Patent Challenge, Alleges Extortion, BNA’s Patent, Trademark & Copyright Journal – Daily Edition, June 25, 2015.

[49] Matthew Bultman, Allergan Says Venture Fund’s AIA Petition Is ‘Extortion’, Law360 (June 24, 2015, 9:17 PM), http://www.law360.com/articles/671895/allergan-says-venture-fund-s-aia-petition-is-extortion-.

[50] Id.

[51] Complaint at 8, Allergan, Inc. v. Ferrum Ferro Capital, LLC, Case 8:15-CV-00992, Docket No. 1 (June 19, 2015); Bultman, supra note 49; Patience Haggin, Allergan Sues Venture Fund Challenging Its Patent, The Recorder (June 23, 2015), http://www.therecorder.com/id=1202730321460/Allergan-Sues-Venture-Fund-Challenging-Its-Patent.

[52] Cary Miller & Matthew Kreeger, PTAB to Consider Motion for “Abuse of Process” Sanctions Against Kyle Bass Hedge Fund IPR Petition, Morrison & Foerster (June 15, 2015), http://www.mofo.com/~/media/Files/ClientAlert/2015/06/150615PTABtoConsiderMotion.pdf (proposed amendment available at http://judiciary.house.gov/_cache/files/4723a430-8a79-4569-b3c8-68e7d828e2a3/goodla-028-xml—managers-substitute—june-9-2015.pdf).

[53] STRONG Patents Act of 2015, S. 632, 114th Cong. § 102 (2015); Lionel Lavenue, A Review of Patent Bills in the 114th Congress, Law360 (June 15, 2015, 11:08 AM), https://www.law360.com/articles/664670/a-review-of-patent-bills-in-the-114th-congress.

[54] Id.

[55] Id.

[56] Id.; STRONG Patents Act of 2015, S. 632, 114th Cong. § 102 (2015); Innovation Act of 2015, H.R. 9, 114th Cong. § 9 (2015).

[57] Official Transcript of Oral Argument Hearing at 43-44, Chinook Licensing DE LLC v. Rozmed LLC et al., No. 14-cv-00598, Docket No. 30 (Jan. 9, 2015); Michael Rosen, Patent “Trolls” Claiming Extortion? Not So Fast, TechPolicyDaily (Dec. 23, 2014), http://www.techpolicydaily.com/technology/patent-trolls-claiming-extortion-not-fast/.

[58] Complaint at 1, Allergan, Inc. v. Ferrum Ferro Capital, LLC, Case 8:15-CV-00992, Docket No. 1 (June 19, 2015); Bultman, supra note 49.

[59] Miller & Kreeger, supra note 52.

[60] Order – Authorizing Patent Owner’s Motion for Sanctions, Coalition for Affordable Drugs VI, LLC. V. Celgene Corp., IPR2015-02092, Paper 5 (June 9, 2015); Miller & Kreeger, supra note 52.

[61] Ed Silverman, Biotech Pushes Back Against Hedge-Fund Manager, Wall Street Journal (June 25, 2015, 8:46 PM), http://www.wsj.com/articles/SB11154342288815824014704581070103071104900.

[62] Scott A. McKeown, The PTAB as a Hedge Fund Tool?, Patents Post-Grant (Jan. 15, 2015), http://www.patentspostgrant.com/the-ptab-as-a-hedge-fund-tool.

[63] Scott Graham, Acorda Goes on Attack Against Hedge Fund’s IPR, The Recorder (May 27, 2015), http://www.therecorder.com/id=1202727635188/Acorda-Goes-on-Attack-Against-Hedge-Funds-IPR.

[64] Casino, supra note 1.