Who is Kyle Bass and Why is He Filing so Many IPR Petitions?

IPR challenges arise most often when a party is sued for patent infringement and the defendant files an IPR petition to have the patent, or at least the claims at issue, invalidated. This scenario is the one that most legislators who drafted the America Invents Act had in mind when they established IPR as a quicker and cheaper alternative to federal district court litigation. Kyle Bass, the Dallas-based hedge fund manager and president of Hayman Capital, has found a more creative use for IPR. Hailed by many as a visionary, Bass rose to prominence after predicting several large-scale economic events, including the subprime mortgage crisis of 2008. In February of 2015, he announced that his next venture would be a foray into the world of pharmaceutical patents.
Bass’s latest strategy is to file and publicize IPR challenges against pharmaceutical patents, betting that the threat of invalidation will cause the parent company’s stock prices to drop. He then either short sells that company’s stock or invests in other companies that would profit if the patents at issue were invalidated. There is evidence that this strategy works, as Bass’s first IPR challenge against Acorda Therapeutics caused its shares to drop by 9.65%. Because pharmaceutical companies enjoy a 20-year period of market exclusivity while their patents are in force before generics can be sold, drug prices during that period are artificially high. Accusing pharmaceutical companies of holding “BS patents,” Bass believes that invalidating them, or at least causing their stock prices to drop through the threat of invalidation, will result in lower drug prices. To demonstrate this ostensible concern for the consumer, Bass even formed an entity called the “Coalition for Affordable Drugs” to be the petitioner in his IPR challenges. As of the date of publication, Bass has filed 32 such petitions.

The main issue for patent observers is whether Bass’s actions are an abuse of post-grant PTAB proceedings. The legislative history of the AIA shows that IPR was established to give those with grievances an inexpensive, efficient forum in which to challenge a patent. Gene Quinn, patent attorney and editor of IPWatchdog.com, argues that it’s hard to believe Congress intended to allow pharmaceutical companies to be subjected to a challenge by an entity that would not have standing to sue in federal district court. However, if Congress wanted to limit IPR petitioners to those who had a vested interest in the case it could have done so, like it did with Covered Business Methods challenges. Unsurprisingly, many in the pharmaceutical industry view Bass’s tactics as abuse and harassment, alleging that he has no real interest in lowering drug prices, but is only in it for personal profit. Acorda Therapeutics CEO Ron Cohen contends that Bass is nothing more than a “reverse patent troll.” This argument is bolstered by Bass’s partnership in this venture with Erich Spangenberg, former head of IPNav, a firm widely regarded as one of the largest patent trolls in operation.

Bass’s tactics are pushing some into action. On July 28, 2015, Celgene Corporation filed a motion for sanctions against the Coalition under a theory of abuse of process. Celgene argues that IPR was designed as an expeditious and less costly alternative to federal district court litigation and not as a tool to affect the stock prices of public companies for financial gain to the detriment of those companies and the investing public. In reply, the Coalition contends that the motivation behind nearly every patent infringement suit and IPR challenge is profit and that it is in the public interest for economically motivated actors to challenge patents. The USPTO does have discretion to issue sanctions for abuse of process, among other infractions, but the Coalition argues that, because the AIA permits any party to file IPR challenges regardless of economic motivation, a dismissal sanction would amount to an impermissible substantive rule that changes existing law governing an individual’s standing to file an IPR petition.

On August 25, 2015, while the motion for sanctions was pending, the PTAB denied the Coalition’s IPR petitions challenging two patents owned by Acorda Therapeutics, finding that the prior art relied upon in the petitions was not sufficiently available to the public to qualify as prior art. The prior art in question was two posters the patent owner had displayed at industry meetings. This ruling caused Acorda’s stock to immediately trade up by 29%. On September 3, 2015, the PTAB once again denied the Coalition’s petition for IPR challenging a patent owned by Biogen. This time the prior art submitted by the Coalition was a description of a placebo-controlled trial of a novel oral agent, which allegedly rendered the claims of Biogen’s patent obvious. The PTAB held that this trial did not qualify as prior art because it had not been made of record, among other findings.

Congress has also taken steps against Bass’s tactics through several patent reform bills, including the Innovation Act (H.R. 9) and the STRONG Patents Act (S.632). The Innovation Act was introduced in February of 2015 and, among various other changes, would bar the institution of IPR unless the petitioner certifies that it and any real parties in interest do not own and will not acquire a financial instrument that is designed to hedge or offset any decrease in the market value of an equity security of the patent owner.The Innovation Act was approved by the House Judiciary Committee in June and was scheduled for a floor vote in July, but this has been postponed due to rising bipartisan opposition to some of the bill’s terms. The STRONG Patents Act goes even further than the Innovation Act. Introduced in March of 2015, it establishes a presumption of validity in IPR proceedings, raises the burden of proof to clear and convincing evidence, and limits standing to file a petition to those who have been sued for infringement of the patent in question. The STRONG Patents Act is still in committee as of the date of publication.

Despite a series of early setbacks, Bass appears to be gaining ground through a series of favorable PTAB decisions. On September 25, 2015, the PTAB denied Celgene’s motion for sanctions, essentially restating the Coalition’s argument that IPR is available to any party who is not the owner of a patent and that profit is at the heart of every IPR challenge, regardless of motive. The PTAB also rendered a decision to institute IPR proceedings on the Coalition’s petition against Cosmo Technologies on October 7, 2015, finding that there is a reasonable likelihood that it will prevail with respect to at least one of the challenged claims of the Cosmo patent. This is the first favorable decision on institution that Bass has received, indicating that more favorable decisions likely will follow.

Bass has raised many an eyebrow by testing the ethical limits of post-grant PTAB proceedings, and has lost several battles in his war against the pharmaceutical industry, with early defeats casting doubt on his ability to succeed. Not only does his venture come during an era of rapid patent reform that could stop it in its tracks, but the PTAB itself does not seem impressed with many of his arguments thus far. However, recent wins have given his venture an air of legitimacy and have no doubt provided him a renewed sense of purpose. The current state of affairs is looking up for Mr. Bass, but his foray into the world of patent litigation is just beginning and many more challenges lie ahead.