A New Business Model: The IPR Troll

In my last post, I discussed new proceedings under the America Invents Act (AIA) of 2012 which a company can use to challenge third party patents. One of the more popular of these procedures is the Inter Partes Review (IPR). In fiscal year 2015, there were over 1700 IPR petitions filed challenging patents and for the first 10 months of fiscal year 2016 ending July 31, nearly 1300 IPR petitions were filed.

IPR Proceedings

In an IPR proceeding, a challenger files a petition with the USPTO’s Patent Trial and Appeal Board (PTAB) charging that at least some of the claims of the patent are invalid over the prior art. The patent owner has the option of submitting a response to the petition. The PTAB will then determine whether the challenger has shown that it has a reasonable likelihood of success in proving that at least one claim of the patent is invalid. If the PTAB finds that the challenger has made such a showing, then the IPR proceeding will commence and the challenger and patent owner will submit more formal proofs to the PTAB which will then make a final determination.

IPR petitioners have been successful in challenging patents. In over 70 percent of IPR petitions, the PTAB has instituted an IPR proceeding and over 70 percent of the final written decisions have invalidated the instituted patent claims.

For the most part, IPR petitions have been filed for a legitimate commercial reason – providing a freedom to operate by removing a believed-to-be invalid patent which would otherwise be an impediment to a company selling a product or providing a service. However, not all IPR filings have been brought for competitive reasons.

IPRs Have Been Used To Challenge Pharmaceutical Patents

In the past year, a number of IPR petitions have been filed challenging the validity of pharmaceutical patents. The challenger in these petitions has been the Coalition for Affordable Drugs which is headed up by a hedge fund manager named Kyle Bass and a self-described “patent troll” named Erich Spangenberg. These petitions have either been filed in the name of the Coalition or in the name of the individuals. Reportedly, these petitions have been filed as part of an investment strategy aimed at driving down the stock price of the targeted pharmaceutical companies.

The accusation against Bass and Spangenberg is that they take a short position on the patent owner’s stock and use the prospect of a successful petition to extort payments from the pharmaceutical companies in exchange for dropping the IPR proceedings. Just as patent trolls arguably misuse the patent litigation process to extort money from small companies, the short sellers are acting as IPR trolls, arguably misusing the IPR process in order to extort money from their targets.

So far, the PTAB has not been open to arguments criticizing the Coalition’s business model and has ruled that an economic motive for challenging a patent as opposed to a competitive motive does not constitute an abuse of process. The PTAB has stated that it takes no position on the merits of short-selling as an investment strategy other than it is legal and regulated. Despite the hands-off approach by the PTAB, the practice of these IPR trolls has garnered some attention.

Potential for Other IPR Troll Behavior

The pharmaceutical industry is an especially attractive target for the IPR troll business model. The stock prices of pharmaceutical companies are often heavily dependent on the exclusivity provided by their patents and a challenge to a patent for a successful drug could have billion dollar ramifications for the patent owner. Paying off the IPR troll to preserve the patent exclusivity is often the best choice for a pharmaceutical company. However, it is not difficult to see how IPR troll behavior can impact other industries.

An IPR petition filed when a young company is set to embark on an IPO could have disastrous effects on the pricing of the company’s shares. The threat that core technology of the company is at risk can be sufficient to drive down the opening stock price. Monetary concessions to the IPR troll may be needed to prevent an IPR from being filed or encourage an IPR petitioner to withdraw a filed petition.
A well-timed IPR petition can also disrupt potential mergers and acquisitions. Because of the uncertainty raised by the filing of an IPR petition, the pending petition can be used by the acquiring party to force price concessions from the target.
Similarly, an IPR petition can raise unneeded questions when a company is seeking financing. The existence of the IPR petition will raise questions and require company management to address issues surrounding the IPR petition rather than continuing to manage the business.

Legislative Solution

The IPR Trolling business is starting to gain some notoriety, but is not yet perceived to be as much of a problem as the patent troll business model. The next Congress is expected to take up legislation directed to patent trolls in 2017. It remains to be seen whether there is enough interest to modify the IPR rules to address the IPR troll behavior.