Westlaw Journal
`
`PHARMACEUTICAL
`
`Litigation News and Analysis (cid:133) Legislation (cid:133) Regulation (cid:133) Expert Commentary
`
`VOLUME 33, ISSUE 1 / FEBRUARY 2017
`
`EXPERT ANALYSIS
`
`’Reverse’ Patent Trolling: Nontraditional
`Participants in the Inter Partes Review Process
`
`By Adam L. Perlman, Esq., and Kathryn S. Kayali, Esq.
`Williams & Connolly
`
`So-called patent trolls are popular villains in the intellectual property world. Likened to the fairytale
`monsters that hide under bridges, only to jump out and demand a toll from those who wish to cross,
`trolls have ignited a seldom-seen public fascination with the patent system.1
`
`Generally speaking, patent trolls — also called “non-practicing entities” or “patent assertion
`entities” — are firms that do not make or sell products of their own but instead acquire and enforce
`patent rights against those who do.
`
`Legal scholars have described the troll dilemma as a matter of economic holdup: An industry
`participant makes a substantial, fixed investment in developing a product and bringing it to market,
`only to be surprised after the fact with a demand for licensing fees from a patent holder it did not
`know existed.2
`The resulting payments have been called a “tax on innovation.”3
`Congress had trolls in mind when drafting the Leahy-Smith America Invents Act, the 2011 legislative
`overhaul of the U.S. patent system.
`In addition to other sweeping changes, the act replaced a struggling “inter partes re-examination”
`system with the new “inter partes review” system — an adversarial, trial-like procedure for challenging
`a patent’s validity before the Patent and Trademark Office, or PTO.
`Many hoped IPRs — envisioned as a faster and cheaper alternative to district court litigation — would
`provide an efficient way for innovative companies to fight back against trolls.
`By statute, anyone “who is not the owner of a patent” can file a petition seeking to invalidate it with
`the Patent Trial and Appeal Board under 35 U.S.C.A. § 311(a).
`Regulations impose some additional limitations, such as the rule, codified in 37 C.F.R. § 42.101, that
`bars a defendant facing infringement claims in court from initiating an IPR on the same patent more
`than a year after being served with the complaint.
`But IPR filers do not face any threshold barriers nearly as high as the “case or controversy
`requirement” of Article III of the U.S. Constitution, which governs who has standing to sue in court.
`
`UNEXPECTED CONSEQUENCES
`The lack of a standing requirement, combined with the relatively high rate at which the PTO
`invalidates patents, has spawned a new, unanticipated phenomenon that turns the patent troll
`model on its head.
`Rather than acquiring and asserting their patents on products they did not develop, legal entities
`are now regularly threatening to challenge, and then challenging, the validity of patents held by
`major corporations, including those in the pharmaceutical industry.
`
`ALL 2110
`MYLAN PHARMACEUTICALS V. ALLERGAN
`IPR2016-01127, -01128, -01129, -01130, -01131 & -01132
`
`

`

`WESTLAW JOURNAL PHARMACEUTICAL
`
`The lack of a standing
`requirement, combined with
`the relatively high rate at
`which the PTO invalidates
`patents, has spawned a new,
`unanticipated phenomenon
`that turns the patent troll
`model on its head.
`
`This recent trend has been called reverse patent trolling — “reverse” because the non-practicing
`entity, instead of asserting its own idle patents, is threatening to file IPR petitions against patent
`owners.
`
`Knowing that patent rights are often critical to a company’s value, so-called reverse trolls operate
`in one of two general ways.
`
`One approach is to contact their targets with draft petitions before filing, hoping to extract quick,
`quiet payments in exchange for keeping an IPR petition off the docket, especially if a patent
`holder has a recent infringement or settlement award to protect.
`
`A second approach takes short positions in the stock of potential targets before filing a petition,
`hoping a serious patent challenge will cause the company’s stock value to plummet.
`
`Even though only a small percentage of IPRs filed to date concern the pharmaceutical industry,
`the importance of patent protection to the value of branded drug companies has made them an
`attractive target for reverse trolling behavior.
`
`REVERSE TROLLING FOR A PAYOFF
`
`In some cases, reverse trolls represent themselves in demand letters as part of the generic
`pharmaceutical market.
`
`In January 2016, for example, a company called Frontier Therapeutics sent Medac Pharma a
`letter enclosing a draft IPR petition for Medac’s U.S. Patent No. 8,664,231. The patent is listed
`in the FDA’s “Orange Book” of pharmaceutical patents as protecting Rasuvo (methotrexate),
`Medac’s injectable psoriasis treatment.
`
`Frontier’s letter stated the company would “approach its development partners to prepare and
`file an abbreviated new drug application, or ANDA, for Rasuvo” as soon as the patent board acted
`on an enclosed petition, which it would file unless Medac agreed to a settlement.4
`
`Medac declined to negotiate, and Frontier filed the petition.
`
`In preliminary filings, Medac pointed out several facts suggesting that Frontier was, in truth,
`unlikely to seek FDA approval.5
`
`Frontier was “a limited liability company established about two months before it filed th[e] IPR,”
`Medac said, whose place of business is a private residence in Washington state.
`
`“Neither [the homeowner] nor any of his companies has apparently ever brought a drug to the
`market or licensed a third party to do so,” the drugmaker wrote.6
`
`Medac also noted that Frontier had not bothered to write its own petition, instead submitting
`a virtual facsimile of a petition filed by an earlier challenger. The company accused Frontier of
`being “a reverse patent troll looking for a payoff.”7
`
`Unfazed, the patent board nevertheless instituted trial.8
`
`Allergan Inc. received a similar letter from Ferrum Ferro Capital in March 2015, claiming Ferrum
`was prepared to seek FDA approval for a generic version of Allergan’s glaucoma drug Combigan
`(brimonidine tartrate/timolol maleate).
`
`The letter proposed the generic name Combivious, a clear play on Combigan and “obvious.”
`Ferrum enclosed a copy of an IPR petition it had filed that same day.
`
`In later proceedings Allergan would claim Ferrum “ha[d] no principal place of business” beyond
`a “mail drop box” and had not hired any personnel or financed any research into developing a
`generic version of Combigan.9
`
`The patent board declined to institute trial, but not because it found that Ferrum was a troll.10
`
`2 | FEBRUARY 2017 ■ VOLUME 33 ■ ISSUE 1
`
`© 2017 Thomson Reuters
`
`ALL 2110
`MYLAN PHARMACEUTICALS V. ALLERGAN
`IPR2016-01127, -01128, -01129, -01130, -01131 & -01132
`
`

`

`WESTLAW JOURNAL PHARMACEUTICAL
`
`In some cases, reverse trolls
`represent themselves in
`demand letters as part of
`the generic pharmaceutical
`market.
`
`HEDGE FUNDS GET IN THE GAME
`
`Other reverse patent trolls show no interest in holding themselves out as generics.
`
`Hedge funds, for instance, have jumped head-first into the IPR game. The best-known player
`is Kyle Bass, a fund manager who challenges pharmaceutical patents through his Coalition for
`Affordable Drugs.
`
`Bass claims to have the altruistic goal of driving down prescription drug prices by invalidating
`“spurious” patents. But he has also candidly acknowledged his strategy for turning a profit while
`embarking on this “crusade.”
`
`Before filing an IPR, Bass shorts the stock of the drug company that owns the patent he plans
`to challenge. He also may take positive positions in companies that would benefit if the patent
`were invalidated.11
`
`The results so far have been mixed, both legally and financially.
`
`As of press time, PTO records show his Coalition has filed for 33 IPRs, including 18 that ultimately
`went to Patent Board trials and 15 petitions the board denied outright.
`
`Of those 18 instituted trials, seven have yielded a final written decision, and six invalidated all the
`challenged patent claims.
`
`One IPR target, Acorda Therapeutics, suffered a drop in value that appears to have been the
`result of a successful short. Other targets underwent changes in valuation that are difficult to
`attribute to Bass’ action alone.12
`
`UNSUCCESSFUL RESPONSES
`
`How can companies targeted by reverse trolls fight back?
`
`They have made little headway in the courts or through the PTO. One of Kyle Bass’ targets filed a
`motion with the patent board alleging an abuse of the IPR process and seeking sanctions.
`
`The board denied the motion, pointedly noting that “[p]rofit is at the heart of nearly every patent
`and nearly every inter partes review.”13
`
`Allergan sued Ferrum Ferro in the U.S. District Court for the Central District of California, alleging
`extortion and unfair business practices. The court dismissed the complaint for lack of subject
`matter jurisdiction.14
`
`And finally, Chinook Licensing, itself a non-practicing entity in the high-tech industry, filed a
`complaint for tortious interference and racketeering in response to a reverse troll’s IPR threat.
`Chinook’s complaint was likewise dismissed.15
`
`With courts refusing to jump into the fray, targets of reverse trolling ultimately must look to
`legislatures for potential fixes.
`
`In the interim, what are some of the considerations patent holders should take into account if
`they find themselves on the wrong side of a reverse-trolling shakedown?
`
`TROLLS HAVE THE LEVERAGE
`
`Where a valuable patent is threatened, it may be tempting to pay some amount of money to
`prevent an IPR challenge since the amounts involved are often far smaller than what the patent
`owner stands to lose.
`
`While that reaction is understandable, there is considerable downside to giving in to the demands
`of reverse patent trolls.
`
`To begin with, since there is no standing requirement to file an IPR, there is a potentially unlimited
`universe of possible petitioners. Any one of them is eligible to file an IPR on the very same patent,
`and feeding the trolls may only encourage more of them to come forward.
`
`© 2017 Thomson Reuters
`
`FEBRUARY 2017 ■ VOLUME 33 ■ ISSUE 1 | 3
`
`ALL 2110
`MYLAN PHARMACEUTICALS V. ALLERGAN
`IPR2016-01127, -01128, -01129, -01130, -01131 & -01132
`
`

`

`WESTLAW JOURNAL PHARMACEUTICAL
`
`The same troll, emboldened by the payoff, could even return to challenge other patents held by
`the same company, restarting the whole process from scratch.
`
`Patent owners considering preemptive settlements should have their eyes wide open to the fact
`that they are unlikely to bring eternal peace.
`
`Another piece of leverage reverse trolls can bring to bear stems from the patent board’s expansive
`joinder rules if it institutes an IPR trial.
`
`For instance, the board can, under 35 U.S.C.A. § 315 and 37 C.F.R. § 42.122(b), join any party that
`files an IPR petition within a month of its decision to institute trial.
`
`That rule gives companies facing patent infringement claims in court an end run around the
`one-year time bar for filing an IPR petition concerning the same patent: If another party files a
`petition upon which the patent board institutes trial, the time-barred can file an IPR seeking to
`join the first proceeding no matter how long it was filed after the lawsuit.
`
`Drug companies facing threats from a reverse troll should bear in mind that a newly filed petition
`could open the door to otherwise time-barred parties who may have greater incentives and
`resources to litigate than the initial troll, many of whom may be actual competitors of the patent
`owner.
`
`Smart reverse trolls know their IPR petitions could give traditional drug companies another bite
`at the apple, and they may use that potential scenario as leverage.
`
`CONCLUSION
`
`At the end of the day, reverse trolls are an unanticipated and undesirable consequence of the new
`IPR regime, but any move to limit their activities will likely require legislation.
`
`In the meantime, any company on the receiving end of a demand letter from a reverse troll must
`carefully assess the value of the property at stake and the strength of the challenger at hand.
`
`It will often be a close call whether a reverse troll’s targets are better off fighting the merits before
`the PTO or trying to avoid an IPR in the first place.
`
`NOTES
`1 Mark A. Lemley, Are Universities Patent Trolls? 18 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 611, 613 n.2
`(2008); This American Life: When Patents Attack! (originally aired July 22, 2011), transcript available at
`http://bit.ly/2m8pJGE.
`
`2 Tun-Jen Chiang, Trolls & Orphans, 96 B.U. L. REV. 691, 694–702 (2016).
`
`James Bessen & Michael J. Meurer, The Direct Costs from NPE Disputes, 99 CORNELL L. REV. 387, 417
`3
`(2014).
`
`4 Frontier Therapeutics LLC v. Medac Gesellschaft Für Klinische Spezialpraparate MBH, No. IPR2016-649
`(PTAB Feb. 22, 2016) (Ex. No. 2001).
`5 Frontier Therapeutics LLC v. Medac Gesellschaft Für Klinische Spezialpraparate MBH, No. IPR2016-649
`(PTAB June 2, 2016) (Paper 9).
`
`6
`
`7
`
`Id.
`
`Id.
`
`8 Frontier Therapeutics LLC v. Medac Gesellschaft Für Klinische Spezialpraparate MBH, No. IPR2016-649
`(PTAB Sept. 1, 2016) (Paper 10).
`
`9 Allergan Inc. v. Ferrum Ferro Capital LLC, No. 15-cv-992, complaint filed (C.D. Cal. June 19, 2016).
`
`10 Ferrum Ferro Capital LLC v. Allergan Sales LLC, No. IPR2015-858 (PTAB Sept. 21, 2015) (Paper 10),
`2015 WL 5608290 at *7.
`
`Joseph Walker & Rob Copeland, New Hedge Fund Strategy: Dispute the Patent, Short the Stock, WALL
`11
`ST. J., Apr. 7, 2015, available at http://on.wsj.com/1GJSjDE; CNBC Exclusive: CNBC Transcript: Hayman
`Capital Management Founder Kyle Bass Speaks with CNBC’s David Faber on “Squawk on the Street” Today,
`CNBC, Sept. 15, 2015, available at http://cnb.cx/2lrnu1v.
`
`4 | FEBRUARY 2017 ■ VOLUME 33 ■ ISSUE 1
`
`© 2017 Thomson Reuters
`
`ALL 2110
`MYLAN PHARMACEUTICALS V. ALLERGAN
`IPR2016-01127, -01128, -01129, -01130, -01131 & -01132
`
`

`

`WESTLAW JOURNAL PHARMACEUTICAL
`
`12 Christopher Edward Neill, Note, The Drug Short: A New Mechanism for Creating Financial Incentives for
`the Discovery of Invalid Pharmaceutical Patents, 23 J. INTELL. PROP. L. 329, 343–44 (2016).
`
`13 Coal. for Affordable Drugs VI v. Celgene Corp., IPR Nos. 2015-1092, 2015-1096, 2015-1102, 2015-1103
`and 2015-1169 (PTAB Sept. 25, 2015) (Paper 19).
`
`14 Allergan Inc. v. Ferrum Ferro Capital LLC et al., No. 15-cv-992, 2015 WL 12670417 (C.D. Cal.
`Dec. 28, 2015).
`
`15 Chinook Licensing DE v. RozMed LLC, No. 14-cv-598, order issued (D. Del. June 13, 2014); Chinook
`Licensing DE v. RozMed LLC, No. 14-cv-598, order issued (D. Del. Dec. 18, 2014).
`
`Adam Perlman (L), a co-chair of the patent litigation practice at Williams & Connolly in
`Washington, has served as lead counsel in major patent cases throughout the country, including
`extensive experience before the U.S. Court of Appeals for the Federal Circuit. Kathryn Kayali (R), a
`Williams & Connolly associate, served as a law clerk with the Federal Circuit and received her law degree
`from Harvard University, where she was submissions co-editor of the university’s Journal of Law and
`Technology.
`
`©2017 Thomson Reuters. This publication was created to provide you with accurate and authoritative information concerning the subject matter
`covered, however it may not necessarily have been prepared by persons licensed to practice law in a particular jurisdiction. The publisher is not
`engaged in rendering legal or other professional advice, and this publication is not a substitute for the advice of an attorney. If you require legal
`or other expert advice, you should seek the services of a competent attorney or other professional. For subscription information, please visit www.
`West.Thomson.com.
`
`© 2017 Thomson Reuters
`
`FEBRUARY 2017 ■ VOLUME 33 ■ ISSUE 1 | 5
`
`ALL 2110
`MYLAN PHARMACEUTICALS V. ALLERGAN
`IPR2016-01127, -01128, -01129, -01130, -01131 & -01132
`
`