Is Patent Reform Working for Drugs?

Recently, controversial hedge-fund manager Kyle Bass, through his wholly owned subsidiary, the Coalition for Affordable Drugs, filed challenges with the Patent Trial and Appeals Board (PTAB) against four established drugs: Amprya, which helps people with multiple sclerosis walk; Xyrem, for narcolepsy; Lialda, for ulcerative colitis; and Gattex, for short bowel syndrome. Bass says these are "invalid patents that contain no meaningful innovations but serve to maintain their anti-competitive high-price monopoly to the detriment of Americans suffering from illness."

In an April Wall Street Journal article, James C. Greenwood, chief executive officer of the Biotechnology Industry Organization, a major trade association, responded that "there's nothing in this man's history to suggest he has any interest in lowering health-care costs." In an earlier February statement, Greenwood had made it clear what he thought was motivating Bass:

Hedge fund manager Kyle Bass has opened a new door to abuse of the US patent system, exploiting the USPTO's patent challenge proceeding as part of his cynical short-selling strategy against innovative biotech companies that are delivering transformative therapies to patients in need.

In short, Bass is challenging patents and then profiting from the damage done to the companies that hold them, either by short-selling their stock or by investing in their competitors. Apparently Bass's consultant, Erich Spangenberg, through nXn Partners LLC, suggests potential targets using a software program that evaluates the strengths and weaknesses of pharmacologic and biologic patents.

This strategy would not have been possible a half-decade ago, before the passage of the America Invents Act in 2011. But despite calls for policymakers to stop it, it's probably here to stay — and it may turn out to be a good thing for consumers.

The America Invents Act was targeted at "patent trolls" — companies that buy dubious patents and use them to sue businesses for infringement. The law created the PTAB and gave it expansive jurisdiction to decide post-grant challenges to patents. With a lower burden of proof for patent invalidation and a broader claim scope as compared to its predecessor (the Board of Patent Appeals and Interferences), the PTAB is designed to review patentability in a timely, cost-effective manner. The board has canceled hundreds of patent claims from the chemical and biotechnology sectors.

The use of PTAB's "inter partes review" (IPR) procedure to invalidate a patent is much more affordable than conventional litigation pursued through the federal courts. Matthew Cutler, an attorney at the law firm of Harness Dickey, is quoted in an April Wall Street Journal article saying that an IPR procedure can cost about $300,000 and take up to 18 months, while the use of conventional litigation could cost $3 million or more and take several years before being resolved.

Another key difference is that under the IPR procedure, a petitioner is not required to have legal "standing" — a concrete stake in the patent at issue, such as being an infringer, a licensee, or a potential licensee.

Some critics of Bass have referred to him as a "reverse patent troll," and pharmaceutical and biotechnology companies want Congress to institute a standing requirement as a remedy for Bass's unforeseen "abuse" of the patent system. But to get a standing amendment considered by Congress will be a formidable legislative challenge. Technology companies are adamantly opposed to limiting the IPR procedure, which they have used aggressively against patent trolls.

And a standing requirement may not make for good policy. While the IPR procedure has many benefits for a patent challenger, it is by no means costless. Bass is employing a rational approach to challenging the validity of specific pharmaceutical or biologic patents. And there could be residual benefits, such as lower costs for pharmaceuticals, to American consumers if these patents are invalidated.

Thomas A. Hemphill is an associate professor of strategy, innovation, and public policy in the University of Michigan-Flint School of Management.