April 14, 2015
`
`Statement of J Kyle Bass
`Chief Investment Officer, Hayman Capital Management, L.P.
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`U.S. House of Representatives
`Committee on the Judiciary
`Hearing: H.R. 9, The “Innovation Act”
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`The Honorable Bob Goodlatte
`Chairman
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`House Judiciary Committee
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`2138 Rayburn Office Building
`Washington, DC 20515
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`The Honorable John Conyers, Jr.
`Ranking Member
`House Judiciary Committee
`B-351 Rayburn Office Building
`Washington, DC 20515
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`Dear Chairman Goodlatte and Ranking Member Conyers:
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`We applaud your recent efforts to examine ways to strengthen the patent system.
`As you continue your work in this area, we strongly urge you to preserve
`important statutory provisions that provide vital patent protections, while
`promoting industry competition and consumer relief. Specifically, we believe that
`the United States Patent and Trademark Office’s (USPTO) Patent Trial and
`Appeals Board (PTAB) is effectively serving an important purpose as currently
`structured under the America Invents Act of 2011 (AIA).
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`As you know, as part of the AIA, Congress created the administrative trial
`proceedings to be conducted by the PTAB to improve patent quality and create a
`more effective and efficient way to challenge patent validity. This is achieved
`through conducting inter partes reviews (IPR) and other post-grant reviews. The
`IPR process was designed to overturn a small minority of patents that are
`particularly vague or lack novelty – regardless of a patent’s technology class.
`Indeed, Mr. Jason Piché, a Medtronic Inc. patent counsel for spinal and biologics
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`1
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`Page 1 of 6
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`CELGENE EXHIBIT 2051
`Coalition for Affordable Drugs VI LLC (Petitioner) v. Celgene Corporation (Patent Owner)
`Case IPR2015-01103
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`recently commented that as a result of IPR challenges to pharmaceutical patents,
`“the drafting of obtuse patents will go away, he said, which is ‘a good thing.’”1 By
`helping identify the few ‘bad apples’, IPR helps strengthen the integrity of the
`vast majority of legitimate and important patents.
`
`The implementation of PTAB IPR proceedings has resulted in significant benefits
`to both consumers and industry. In particular, IPR proceedings are highly
`beneficial because they appropriately allow patent validity to be examined by a
`panel of agency experts rather than a court, and provide a faster, more
`affordable alternative to the judicial system in challenging patents. The PTAB
`system as currently structured has thus far been highly effective in eliminating
`particularly egregious invalid patent claims. We believe the PTAB IPR processes
`should be left in their current form as the USPTO continues to carry out
`Congress’ directives outlined in the AIA.
`
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`The abuse of the patent system by entities acquiring and enforcing weak patents
`is not limited to one particular industry or type of patent – and for that reason the
`AIA did not limit its IPR procedures to particular technology classes. And while
`weak patents in the electrical and computer technology sectors impose costs on
`large technological companies, weak patents in the pharmaceutical sector
`impose economic costs that reverberate throughout the U.S. economy in the
`form of high prices for prescription drugs.
`
` A
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` small number of companies in the pharmaceutical industry have engaged in
`abusive practices by acquiring and enforcing weak patents. The sheer
`ridiculousness of simple concepts that are claimed to be “novel” in certain
`pharmaceutical patents like “siliconized rubber stoppers” (US Pat No. 8,476,010),
`an “exclusive pharmacy” using “exclusive databases” (US Patent No. 7,895,059),
`taking an old drug for “at least two weeks” for a chronic condition (8,007,826),
`taking an old oral contraceptive for “24 days” instead of 21 days (US Patent No.
`5,552,394), and certain others, keep these few drug companies’ monopolies on
`old products alive. These abuses of the patent system are taxes on the US
`economy, public welfare, and every citizen afflicted by diseases that range from
`Multiple Sclerosis to Narcolepsy and a number of other conditions. If nothing
`novel is disclosed, a patent owner should not be rewarded with a government
`grant of a 20-year monopoly.
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`Hayman Capital Management is a $2 billion investment management firm based
`in Dallas, Texas. Hayman has been in operation for nine years and has had a
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`1 “Pharma Moves From ‘Denial’ To ‘Acceptance’ Of Post-Grant Patent Challenges,”
`Brenda Sandburg, The Pink Sheet, April 6, 2015.
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`2
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`the past
`imbalances over
`in spotting global
`record
`track
`successful
`decade. Hayman has been historically successful in identifying, in advance, the
`subprime mortgage crisis, European sovereign debt crisis, and current stresses
`in Japan, and counseling politicians and corporate actors about potential
`consequences. In all cases, we took a simple, common sense approach to each
`situation, analyzed the specific nuances, and implemented a sound investment
`policy around our conclusions.
`
`Over the past year, a small number of monopolistic drug franchises that have
`gone unchecked have become our special focus. We intend to challenge less
`than 1% of the existing branded drug universe (which includes 3,522 branded
`prescription drugs, according to IMS data) in order to police the abusive patent
`tactics used by the worst offending drug companies. Unlike many historical
`challenges by generic drug companies in the Federal court system and the
`PTAB, Hayman will NOT accept settlement payments in order to drop our
`challenges. We are filing merit-based IPRs at the USPTO with the full
`expectation of seeing the challenge through to a final decision by the
`PTAB. These actions provide one of the few impartial arbiters of abusive patent
`monopolies in the marketplace.
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`There are three reasons generic pharmaceutical companies are not effective or
`reliable policemen of the patent abuses that certain branded manufacturers
`engage in, which cause harm to the economy, society, and citizens afflicted with
`disease.
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`First, to avoid the risk of a finding of invalidity in Hatch Waxman litigation and
`losing a patent, brand manufacturers for years have entered into “pay for delay”
`arrangements, where brand pharmaceutical companies pay significant sums of
`money to generic companies to drop lawsuits challenging brand patent validity.
`In many instances the goal of generic companies is not to eliminate the brand’s
`monopoly profits based on weak patents—it is to share in those profits with the
`brand manufacturer. The recent record from IPRs filed by generics challenging
`brand patents shows this same pattern continuing—a generic filed an IPR on the
`brand “rubber stopper” patent identified above, and in less than three months the
`generic dropped the IPR validity challenge and settled with the brand.2
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`Second, brand manufacturers’ strategies to avoid generic entry have become
`more sophisticated. In a recent report to Congress 3 , the FTC outlined the
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`2 See Dr. Reddy’s Laboratories, Inc. v. Fresenius Kabi USA, LLC, IPR2015-00715,
`Paper No. 12 (PTAB, April 2, 2015).
`3 Prepared Statement of the Federal Trade Commission, Before the United States
`House of Representatives Committee on the Judiciary, Subcommittee on Regulatory
`3
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`decade-long challenge it has faced in attempting to end “pay for delay” and other
`antics engaged in by brands and generic “competitors”. These include “no-
`authorized-generic” commitments (when a brand-name drug firm agrees not to
`launch its own authorized generic when the first generic company begins to
`compete), “REMS” strategies (when a brand-name drug firm uses safety
`protocols to deny generic manufacturers access to samples to prevent the
`generic from being able to conduct bioequivalence testing—the “exclusive
`pharmacy” and "exclusive database” patent noted above) and “product hopping”
`(when brand-name drug firms make minor non-therapeutic changes to their
`product, obtain patents on these minor changes and shift physician prescribing
`patters to the newer patent-protected version of the drug, extending the brand
`monopoly).
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`Third, many times generic companies will forego challenging the validity of a
`brand patent in favor of attempting to design a drug that does not infringe on the
`brand patent. When a generic succeeds in avoiding infringement, there will be a
`period of time where only one generic product is on the market, creating an
`effective duopoly implicitly designed to keep drug prices and profits sky high.
`This hurts consumers, who would otherwise benefit from lower prices.
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`We are not alone in calling attention to the negative impact these tactics have. In
`2010, the Federal Trade Commission authored a report titled “Pay for Delay:
`How Drug Company Pay-Offs Cost Consumers Billions.” 4 The Commission
`concluded
`that, “[p]ay-for-delay agreements have significantly postponed
`substantial consumer savings from lower generic drug prices. The Commission
`has recommended that Congress should pass legislation to protect consumers
`from such anticompetitive agreements.”
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`So far neither the FTC nor generic challenges have stopped “pay for delay”. But
`the IPR process can. Hayman is not interested in pay for delay or any settlement
`that does not clear the way for all generic competitors to enter the market and
`drive down drug prices.
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`Some have expressed concern that third parties are able to file IPR petitions.
`Like the procedures for challenging validity that existed at the USPTO prior to the
`
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`Reform, Commercial and Antitrust Law, “Oversight of the Enforcement of the Antitrust
`Laws,” November 15, 2013.
`http://judiciary.house.gov/files/hearings/113th/11152013/FTC%20Testimony%20Re%20
`Antitrust%20Law%20Enforcement%20House%2011%2015%202013.pdf.
`4 https://www.ftc.gov/sites/default/files/documents/reports/pay-delay-how-drug-
`company-pay-offs-cost-consumers-billions-federal-trade-commission-staff-
`study/100112payfordelayrpt.pdf.
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`AIA (ex parte and inter partes reexaminations), and like procedures that exist in
`Europe and the rest of the world (opposition proceedings), Congress specifically
`provided in the AIA that “any person” may file an IPR proceeding. This is
`absolutely consistent with US historical practices and sound policy. During his
`keynote address at the American Conference Institute’s recent meeting in New
`York on post-grant PTO proceedings, PTAB Chief Justice James Donald Smith
`explained that “[t]he statute divides the world of any patent into two camps, the
`patent owner and anyone other than the patent owner who, once meeting
`standing requirements, is permitted to file a petition. It serves everyone’s
`purposes to not be seen to be looking too much at who is bringing the action
`once they meet those requirements.”5
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`The PTAB is operating as Congress intended and has proven to be a powerful
`and effective tool in ensuring robust oversight of patent validity. Therefore, any
`changes to the PTAB could reverse tangible positive impacts and interfere with
`the USPTO’s meaningful ongoing efforts to evaluate and improve PTAB
`processes based on public feedback.
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`While H.R. 9 has many positive attributes, any change to the PTAB’s use of
`“Broadest Reasonable Interpretation” (BRI) in interpreting patent claims at this
`juncture would be premature and harmful. If during the patent application process
`patent owners choose not to narrowly define key patent claim terms—why should
`they benefit from a narrow construction of claim terms that could salvage validity
`during an IPR when they chose to leave vague claim terms undefined during
`prosecution? The “vagueness” of patents is very much a problem created by the
`patent owner.
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`Two recent developments further confirm that Congress should wait to act on the
`BRI issue. In February of this year, the United States Court of Appeals for the
`Federal Circuit approved of the PTAB’s use of BRI, noting that Congress gave
`this rule-making authority to the Director of the USPTO noting that “the broadest
`reasonable interpretation standard has been applied by the [USPTO]…for more
`than 100 years in various types of [USPTO] proceedings.”6 The Federal Circuit
`further noted its long history of the approval of the use of BRI, explaining that,
`“[i]ndeed, that [BRI] standard has been applied in every [USPTO] proceeding
`involving unexpired patents.” This includes, of course, pre-AIA proceedings to
`invalidate patents. On March 27, 2015 USPTO Director Michelle Lee announced
`a series of rule changes applicable to all IPR proceedings that went into
`immediate effect and included making motions to amend claims easier during an
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`5 “‘Reverse Patent Trolls’ Allowed To Pursue PTO Patent Challenges,” Brenda
`Sandburg, The Pink Sheet, April 6, 2015.
`6 See In re Cuozzo Speed Techs., LLC, 778 F.3d 1271 (Fed. Cir. 2015).
`5
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`IPR proceeding. If the patent owner is able to amend claims in an IPR, the BRI
`standard is absolutely the proper standard. Congress should maintain the BRI
`standard in deference to both the 100 years of USPTO history and to the recent
`changes announced by Director Lee.
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`The AIA has been in full effect for only 30 months, and Congress should take a
`cautious and balanced approach to considering material changes to the PTAB at
`the request of a single industry. A small minority of drug companies are abusing
`the patent system to sustain invalid patents that contain no meaningful
`innovations but serve
`to maintain
`their own anti-competitive, high-price
`monopoly, harming Americans suffering from illnesses.
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`Our IPR petitions fulfill and define the purpose of the IPR process and address
`very specific patents that we believe, unlike the vast majority of legitimate
`patents, do not represent true innovation or invention.
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`Sincerely,
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`
` J
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` Kyle Bass
`Chief Investment Officer
`Hayman Capital Management, L.P.
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