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Nice Patent You Have There. . .

This does not seem to me like a great advance in intellectual property law: this Bloomberg article says that some large investors are using the patent challenge process for their own purposes:

Taking advantage of new rules created by Congress three years ago, hedge funds have increasingly been filing challenges to pharmaceutical patents. Some may be angling for payouts to drop their claims, while others are shorting the stock, betting that the manufacturers’ shares will plummet.
Activist investor Kyle Bass sent a shudder through the drug industry earlier this year by embarking on a patent-challenging strategy. Now a New York hedge fund, Ferrum Ferro Capital LLC, has made an even more brazen move by seeking to invalidate an Allergan Inc. patent that has already been upheld in court. Neither investment firm has said whether it’s betting against specific stocks.

I’m generally a lot more sympathetic to short-sellers than most people are. I’ve gone short myself at times (although not in recent years), and I think that the markets need people who are attuned to the downside. This, though, seems to be crossing a line. The challenge only costs $23,000 or so under the rules put in place in 2012, though, so it’s a weapon just sitting there ready to be used. And it appears to be getting used about five times as much as the PTO expected. An investment fund didn’t usually have the standing to challenge a patent in court, but now the door is open.
We’ll see how much of a problem this turns out to be. The challenge system was loosened up in order to deal with yet another problem, patent trolling, where people use portfolios of overly-broad issued patents to shake down everyone within reach. And that’s not a productive activity, either, but we may have to aim for a process that doesn’t allow new shakedowns to arise in the place of the old ones.

29 comments on “Nice Patent You Have There. . .”

  1. anon the II says:

    Seems like there was a suggestion from Shakespeare to deal with this problem.

  2. OneNeoEno says:

    It would seem to me that short-selling a stock right before taking an action of *any* kind that you would expect to cause a drop in the price of that stock would already be illegal. I would expect the SEC to be knocking on their door in short order.

  3. MoBio says:

    From a strictly economic perspective it might make sense.
    Even if the success rate is

  4. MoBio says:

    Even if the success rate is

  5. alig says:

    Don’t hate the player, hate the game

  6. patently says:

    The problem here is not the “low” official fee required to kick off one of these challenges. By way of comparison, the fee to initiate the same sort of challenge in the UK Patent Office is £50. Even the UK Court fee is £2,200 at most. The European Patent Office charges €850. $23,000 is actually ridiculously high, and deters genuine businesses that don’t have the financial clout of many pharma companies from bringing genuine challenges to invalid patents.
    The problem is the sheer complexity of US legal process and (I’ll be frank) the significant random element in the judgements it produces. Sort that out and the many and varied problems in the US patent system will fall out naturally.

  7. johnnyboy says:

    This is open and brazen market manipulation. Hedge funds know they’ll get away with it because of the slowness of regulatory bodies like the SEC, and that if they ever get fined it will be a light slap on the wrist compared to the money they can make.

  8. Chemist turned Banker says:

    The appeal of this trade is obvious- short stock, file IPR, tell world you’ve filed the IPR, cover the short at a profit- but I do wonder how the SEC would view this from the perspective of market manipulation? By doing this, one is effectively an insider on one’s own trade and the illegality of that is far from clear, but I would certainly agree that this does not pass the sniff test convincingly…

  9. A Different Nonny Mouse says:

    Yeah, I have to agree with the other comments. Extortion and stock manipulation are both already illegal. The thing to do is to put some teeth into those laws.

  10. Anonymous says:

    The real scandal is that this behavior is probably not illegal.

  11. RTW says:

    And people complain about the costs of drugs. It this sort of BS that pharma has to fight, and that effects the bottom line. This sort of thing directly effects the companies bottom line, both in terms of litigation costs, but adverse stock fluctuations as well.

  12. George Kaplan says:

    @8 While not a securities law expert either, I agree that there illegality is unclear; The whole area is quite gray. Until the SEC or a US District Att’ys open investigations or file charges, we can only speculate. Frankly, in many white collar crime scenarios, the notice aspect of criminal law is missing: You only know it is “illegal” when the the sheriff rides up wearing a white hat accompanied by a posse of reporters.
    Harvey Silverglate has a couple of well explained examples in hid book “Three Felonies a Day.”

  13. Caleb says:

    While the filing fee is “only” $23,000, that does not include the cost of actually pursuing the action. Without *significant* additional legal work, the Board (the Board of Patent and Trademark Appeals) will not institute the proceeding. And with respect to No. 6 and the “random” judgments, these proceedings are heard before three administrative law judges at the Patent Office, who are subject matter experts in patent law. In contrast, District Court judges hear cases in virtually all areas of federal law.

  14. annonie says:

    If there’s a new law or regulation that gives an opening for making money with simply a small investment and moving around some paperwork, there will be scoundrels to pick up the trick. And hedge funds are simply very large collections of scoundrel money.

  15. pete says:

    Just don’t hold your breath expecting our current Congress to pass legislation restricting this kind of thing. It would upset their benefactors.

  16. Loweeel says:

    Patent litigator chiming in here — simply because the patent has been upheld in court doesn’t really mean much for IPR petitions.
    In court, patents are presumed valid, and can only be proven invalid by “clear and convincing evidence” (~2/3).
    By contrast, in the administrative proceeding of Inter Partes Review (like the old reexamination or the original examination), invalidity only need be proven by a preponderance of the evidence (50% + ϵ).
    So even if the exact same invalidity references are involved, the fact that the patent was held valid in court doesn’t really mean much to whether it can (or should) be held invalid in an IPR.
    Also, Caleb is correct — there is a *substantial* amount of work that goes into filing these things, and knowing what my billing rate is (and what experts usually charge), I’d estimate the total cost of these doesn’t come in under $100K just to file, unless somebody has some sort of absurdly generous fee arrangement.
    Conversely, “patently” ‘s statement “$23,000 is actually ridiculously high, and deters genuine businesses that don’t have the financial clout of many pharma companies from bringing genuine challenges to invalid patents.” is incorrect and/or incomplete in several ways. (1) small and micro entities are entitled to substantially reduced fees for IPR petitions — (2) most IPRs are filed in the tech space, not Pharma, so it’s pretty clear that plenty of companies that aren’t anywhere near the size of big pharma are actually filing these.

  17. Dr. Manhattan says:

    Should be the subject a “60 Minutes” report. It seems as soon as something that suggests some type of quasi-legal manipulation for profiteering is exposed there, the legislators suddenly wake up. “I’m shocked, shocked I tell you, that gambling is going on in this building!”

  18. Anonymous says:

    What’s the difference between this and shorting the stock market before flying planes into the WTC?

  19. HelicalInvestor says:

    It isn’t patents that are the primary issue in my opinion, but that data exclusivity is too short. Needs to be 10 years.

  20. Anonymous says:

    @18 maybe the fact that people are actually doing this one

  21. anonymous says:

    Surely a company called Ferrum Ferro Capital can’t do anything brazenly, but only ironically?

  22. HelicalInvestor says:

    : )

  23. CMCguy says:

    #21 however is FFC used an iron skillet to first sear the patent wouldn’t they be braising it and without a spell check who would know?

  24. Anon2 says:

    When you have activist investors that get involved for the sake of money and better-ness of people, a good situation can result.
    Many of us saw the Lumber-Liquidators episode on 60-Minutes a couple weeks back. That worked out because the wood was coming up with excessive amounts of formaldehyde (based on California regulations). So in that case it really helped folks. In this case it may help IF another company can wiggle itself in and find a market based on the gap that results when another company loses a patent….however, that seems extremely far fetched. Especially as many companies of any value will have an IP strategy that isn’t based on single patent, but instead by several all overlapping.
    I am having a hard time figuring out how what some of these firms are doing in biotech/pharma are really going to help the public.

  25. fajensen says:

    ” I would expect the SEC to be knocking on their door in short order. ”
    Never happens, well, it would if “you & I did it”, but massive, institutionalised fraud – Nah, it’s just Markets.
    The situation is that people go from Wall Street, to Hedge Funds, to the SEC, to some think-tank making up policy advice on free trade and then back to Wall Street again, because of this “magick circle” policies will be Deregulation and Zero Enforcement of whatever isn’t deregulated (yet) ALL the way,
    Anything Goes, this is what money laundering and funding for terrorism get you – deferred bonuses and a fine of a few days profit (which the stockholders will pay, not the crooked management):

  26. patently says:

    @16 Loweeel: I’m a European Patent Attorney with over 20 years experience. I’ve seen it happen. I’m not making this up.

  27. Nile says:

    Look up the offence of ‘Barratry’ – the legal malpractice of initiating a lawsuit for no purpose other than inflicting the cost and disruption of the suit itself.
    As you would expect, the statute has fallen into disuse (or has been abolished altogether) in every jurisdiction where trial lawyers can exert improper influence on legislators and the judiciary.
    Encumbering a startup with a lawsuit is a common tactic in the run-up to an iIPO, with the usual objectives being control or a substantial share allocation, or an outright cancellation of the IPO and forced sale to the ‘plaintiff’.
    There’s nothing new in this ‘news’ except for the misuse of patent law and the manipulation of a publicly-traded security – but this share price manipulation relies on public information (the filing of the suit at the court) rather than ‘insider’ knowledge – and any legal argument about ‘barratry’ runs straight into the constitutionally-protected right to pursue a grievance in the courts.
    You’re stuck with this. Barring major changes to the law – the British practice of landing all the costs on the loser, or a pre-trial indemnity for the defendant’s costs imposed against a ‘vexatious litigant’ – you’re going to see yet wnother cost imposed on innovation, and yet another reason to regard drug discovery and development as inherently unprofitable.
    One more example of productive enterprise being squeezed out by rent-seeking. For the non-economists out there, this is all part of the secular shift from the productive investment of capital into the purchase of rents: there are many labels for it but the commonest is ‘neofeudalism’.

  28. Patent Doctor says:

    There is nothing wrong with this as a strategy (for those who believe the shorting of stock is in principle an acceptable practice). Patents are challenged around the world on a daily basis including numerous key product patents at the EPO where the market covered is over 300 million people. US financial value is usually more, though both are still considerable.
    If a key product patent is invalidated of course the stock price will suffer. If a challenge is initiated (not just in the US) whether the stock price falls or not should depend on the likelihood of the challenge being successful. The problem is the ignorance of the stock markets where knee-jerk reactions to news cause fluctuations in price. The short-selling challengers are simply taking advantage of this behaviour.
    It is worth remembering that no-one is forced to sell their shares when the price falls and they can keep hold of them until it stabilises. The learning is for those who provide the opportunity for the short-sellers. Presumably there is someone on the other side of the trade allowing it to happen.
    The fees for filing a challenge in the UK/Europe are not the the only costs involved so the differences are not that great. Anyone who has signed the cheque for an EP opposition will testify to that.

  29. Jon Tyson says:

    My problem with shorts, such as yourself, are
    A. There are plenty of ideas that many work, but only provided enough capital is provided. In particular, a short or group of shorts can ensure that an otherwise good idea will NOT work, because he/they can snuff out the ability to raise capital required.
    B. If I want to invest in a development-stage biotech attempting to treat some horrible disease, then I would like to be able to invest in actually treating the disease. If I loose money then at least I know the money went to a good cause. However, with shorts in the picture then the money may not have gone to a good cause at all: It simply may have gone to enriching some greedy short.
    C. Even in circumstances where shorts provide some economic benefit, it is not clear that their profits are at all in line with whatever benefit is provided. For example, if I pay someone $1000 to spread butter on my toast then the guy has provided a legitimate service. However, his compensation is way out-of-line with the value he has created.

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