05 November 2015

The New Patent Extortionist

For years the press has been awash with stories of so-called patent trolls who stalk their unsuspecting prey by suing on patents that are of low quality. While a relative minority of entities labelled as “trolls” in the past were asserting invalid claims (in fact studies show the phrase was used to characterize many patent holders who legitimately won at trial), clearly the perception became that there were large numbers of patent extortionists waiting to threaten litigation at the drop of the hat. It was the story of the troll that pushed Congress to pass the America Invents Act (AIA) amending the Patent Act to include a new mechanism for challenging patents at the United States Patent and Trademark Office, known as the Inter Partes Review (IPR). IPR was designed to make it faster and easier to invalidate patents. Initially the new procedure provided exactly what its authors desired, quickly becoming the mechanism of choice for a quick kill of weak patent claims. However, the procedures became so effective with nearly every patent coming before the PTAB being found to be defective that soon the PTAB, the USPTO board that handled such contests, was accused of being nothing more than a death squad. It was only a matter of time before the knowledge of the high rate of patent kill cultured a new type of insidious patent extortionist who saw in the IPR procedure a quick mechanism for extorting significant sums from patent holders and the public at large.

One of the earliest IPR patent extortionists took advantage of a glaring difference between the old inter partes reexamination procedure and IPR. Unlike in inter partes reexamination, in IPR, there is the ability to terminate the proceeding when settlement is reached. 35 U.S.C. §317. Knowing this, the new extortionist learned to scan the litigation dockets for patentees who prevailed in obtaining substantial monetary judgments in court pertaining to patent infringement by another. They then filed an IPR at the patent office often using the very same art that the patent infringer had unsuccessfully used at court to try to invalidate patent claims recognizing a disconnect existing between the standard of invalidity used by Article III courts (requiring proof by clear and convincing evidence for invalidity) and the United States Patent and Trademark Office, whose standard was much more lax (requiring proof of invalidity only by a preponderance of the evidence). As the standard for invalidity at the USPTO is much lower than the courts, and claim construction at the USPTO is considerable more broad than in the courts (the USPTO construes claims using the broadest reasonable interpretation wherein the courts have a very structured protocol for interpreting claims that generally leads to a much narrower interpretation of claim terms), the idea was that such filings would be permissible, and possibly could prevail. They then sought a portion of the obtained judgment from the patent owner to withdraw the IPR as part of settlement.

Others recognized yet another difference that IPR offered over the older inter partes reexamination that made challenges highly stacked in favor of the challenger. In IPR, the USPTO by regulation had made amendment of claims by the patent owner in the procedure to be almost impossible wherein amendment was far more available in the old inter partes reexamination proceedings. These extortionists reasoned that the very challenge of any key patent to a company would likely lead to a settlement given companies would understand their hands were tied to overcome any minor deficiency in claim drafting that might arise due to the broadest reasonable interpretation used by the USPTO by amendment of their claims. This reasoning was all the more supported by the fact that the Federal Circuit seemed to uphold nearly all of the USPTO broadest reasonable interpretation rulings. The mere threat of a challenge of important patent to a company could lead to consideration passing between the would-be challenger and the patent holder.

The latest extortionist has taken advantage of the high institution rate for IPRs at the USPTO, in conjunction with the early high level of the PTAB in finding claims invalid in IPR proceedings. These extortionists understand that a few select IPRs can be used to manipulate stock price if the patents being challenged are key to the protection of a major product of the company. Most of these extortionists have directed their energy to drug and biotechnology patents, as drug and biotechnology based products generally have fewer patents covering them then do electronic or mechanical devices. Thus hedge fund managers and other in the financial realm have been undertaking a war to challenge patents on drugs, while making a tidy profit on shorting the stock. Of course, other companies in other technology areas are not protected against this extortion scheme if they have only a few patents covering important product lines. For example, VirnetX has recently moved for sanctions against a hedge fund for stock manipulation that had filed an IPR on two network security patents of VirnetX that in litigation VirnetX had shown to be infringed by Apple. Other attempts have been made by companies at the District level to challenge the actions of certain venture funds in filing IPRs under a theory of attempted civil extortion (See, e.g. Allergan v. Ferrum Ferro Capital, LLC and Kevin Barnes in the U.S. District Court for the Central District of California). In denial of one of the sanction motions brought by Celgene against the hedge fund Coalition for Affordable Drugs VI, the PTAB panel noted that the AIA permits challenges on any basis.

Congress is under considerable pressure to alter the IPR process to stop what companies see as abuse. Until something is done, follow the adage “Patent owners beware.” Given the rush to the extortion gold field, there is no better time than now to review one's patent portfolio against product sales to determine if there is any fissure in the armor that might be exploited by a patent extortionist, and which with forethought could be plugged.

This article originally published on Inside Counsel on November 5, 2015
Reprinted with permission from “InsideCounsel”© 2015 ALM Media Properties, LLC. All rights reserved.
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