From October 2016 to March 2017 the team is joined by Guest Kats Rosie Burbidge and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Tian Lu and Hayleigh Bosher.

Sunday, 31 May 2015

When things go wrong: inherited claim formats, unforeseen consequences and using IPR to manipulate stock prices

Swiss style claims – what do they really mean?

Bio and pharma patent attorneys have had an entertaining few months following the exploits of Swiss-style claims in the Courts of England and Wales. As a reminder to those unfamiliar with these claims the format is below:

‘Use of drug X in the manufacture of a medicament for treating disease Y.’
The format is tremendously flexible though, and claims like this are possible:
‘Use of drug X in the manufacture of a medicament for preventing disease Y in an individual with gene Z that leads to susceptibility to disease Y, wherein drug X is administered by a device implanted in the arm of the individual which simultaneously delivers an electric current to the surrounding tissues.’
To avoid infringement of the Swiss claim no one
was told which drug was being manufactured
In January in Warner-Lambert Company, LLC v Actavis Group Ptc EHF & Others [2015] EWHC 72 (Pat) Mr Justice Arnold said the Swiss style claim requires the infringer to ‘subjectively intend’ that the medicament will be used for the relevant condition. Last week the Court of Appeal said that was incorrect in Warner-Lambert Company, LLC v Actavis Group Ptc EHF & Others [2015] EWCA Civ 556, and that actually all that is required is for the infringer to know, or be able to reasonably foresee, that the medicament would be used to treat the condition (Katpost here). In the decision the Court of Appeal complained:
‘54. There are other criticisms which could be made of Swiss form claims. If the purpose of the new form of claim was to maintain the policy of preventing doctors being sued for infringement, it is difficult to see how that is achieved. As the claim is a process claim (see below), its direct product, the medicine, is an infringement, and all those who use or dispose of the product will infringe. The EPC 2000 seems even more apt to catch anyone who uses the product. As Lord Nicholls of Birkenhead said in Sempra Metals v IRC [2007] UKHL 34; [2008] 1 AC 561 at [51]:  
"Legal rules which are not soundly based resemble proverbial bad pennies: they turn up again and again." 
55. So it is here. As I shall have to explain, thirty years after the decision in Eisai courts of member states are still working out how to deal with the fall-out from that case. It would have been better if doctors had been provided with a defence, or the restriction on methods of treatment repealed altogether.’ 
Passing on a claim format
is not always kind
Who knew 30 years ago that the High Court, England and Wales, would misinterpret the meaning of a Swiss style claim in this way? In fact I’ve known patent attorneys who deal with Swiss style claims every day. They understand them in their ‘bones’ so to say, and they’ve realised for many years the terrible complexity of deciding on how such claims would be infringed, as Mr Justice Arnold has discovered. In the second example of the claim I have given above, to what extent do the parties that detect gene Z, make the device or implant the device infringe?


Undoing things and the intergenerational inheritance of claims formats

Only now are we realising how inappropriate it was to use Swiss style claims to get round the prohibition on patenting methods of treatment. I recently read a paper by Thambisetty (see here) which talks of how
‘claim formats in Examination Guidelines often draw on previous texts and are the result of complex legal and technical compromises struck along the way, and intergenerational because often these compromises refer to historic arrangements, which although devoid of current substantive significance continue to have an impact on the contours of the claims’
So we ‘inherit’ our claim formats and are stuck with them, and there seems to be little we can do about that.

How is patent reform in the US going?

This Kat admits to being a bit lost trying to follow patent reform in the US. This blog gives occasional insights (here), but it is clear that there is a lot of legislation proceeding through Congress such as the following Acts (here):
The Innovation Act - has provisions for fee-shifting (the loser in patent litigation pays the attorney fees), heightened pleading standards and a “customer-stay provision” (which seeks to protect customers from patent lawsuits). 
The TROL Act – which addresses the sending of bad faith patent demand letters. 
The STRONG Patents Act - has several provisions including some relating to post grant proceedings carried out by the Patent Trial and Appeal Board (PTAB) requiring it to abandon the broadest reasonable interpretation standard (BRI) and mandating that claims be presumed valid. 
The PATENT Act - which also concerns litigation and includes higher pleading standards. 
The Innovation Protection Act - which concerns funding of the United Stated Patent and Trademark Office (USPTO).
The pace of reform happening in the US is quite astounding and impressive. Clearly Congress feels it must be responsive to problems in the patent system, and I wish the UK Parliament was equally responsive to IP issues.

Unintended Consequences of the America Invents Act (AIA)

The AIA brought in new post-grant procedures at the USPTO where third parties could attack and cause revocation of a patent. Such proceedings have been found to be a highly effective way of revoking a patent, and that happens in a high proportion of cases. Inter Partes Review (IPR) is one such procedure and is now being used to manipulate the stock prices of companies (here). The company stock is ‘short’ sold where a party makes money when the price of a stock goes down (here) and then an IPR is filed to bring the stock price down. Further, hedge funds are now filing IPRs as part of strategies to bring down the value of small pharmaceutical companies (here).

Unintended consequences
The provisions of the AIA came into effect in 2012 and 2013, and we are slowly discovering all the unintended consequences. Patent rights play a finely-balanced role in the economy. Whenever the rights are strengthened or weakened then many different parties will gain or lose, and there are always unintended consequences. On wonders what other fallout there will be from the AIA, and then in turn from all the other Acts which Congress is in the process of rolling out. The example of Swiss style claims is a reminder that things are not easily undone, and it is easy for quick fixes to leave problems for future generations.

13 comments:

Michael Factor said...

The US President is a lame duck democrat whereas the House is Republican.

Intellectual Property reform is one of the very few issues that isn't considered partisan. Consequently, the US is advancing IP reform as they can't move on anything else.

Of course, the AIA is anything but a help to American Inventors, and in general, the effect of pieces of proposed litigation is typically very different from their titles or what the sponsors intend.

Anonymous said...

In my opinion, the practice of shorting a stock before filing an IPR against a patent owned by the shorted company is NOT "stock manipulation". Otherwise, we could also consider as "stock manipulation" the much more common practice of filing dozens of patent applications of dubious merit to pump up the apparent value of a company in the eyes of investors.

Moreover, I would not consider the development of this practice to be an "unintended consequence" of the AIA, but on the contrary I think it is the perfect example of the patent system working just as it should, weeding out invalid patents that should never have been granted in the first place, making potential investors eye patent portfolios more critically, and preventing the unwarranted diversion of resources (in particular, in the case of invalid pharmaceutical patents, the diversion of resources that should rightfully be allocated to our public health). I can hardly see any downside whatsoever to this practice, and can only be glad that someone has figured out a financial incentive for tackling invalid patents.

Anonymous said...

Interesting side note about hedge funds shorting US pharma stock and then filing an Inter-Partes Review with the USPTO to drive down the stock price. Not intended by the AIA, but you can hardly object - everybody benefits from bad patents being revoked, right?

Still, it looks like pharmaceutical companies would better opt-out their European patents out of the European UPC system when it finally gets here, otherwise this would happen to their European patents as well.

Anonymous said...

I think that the two anonymice ahead of me fail to realize that the shorting has nothing to do with any consideration of the value of the actions towards "cleaning up" the patent system.

This IS pure gaming of the system. That the ends match the desired ends of the anonymice matters not at all in consideration of the means to those ends. IN any (and all) areas of law, such matter.

Suleman Ali said...

Thank you anons of 8:22 and 9:22. I don't think it is as simple as saying that everybody benefits from bad patents being revoked. One must consider the costs of defending patents in IPR. The smaller guys are not going to be able to defend with the same resources as the bigger guys. They won't be able to find all the documents that support their position, generate data, consider all the amendments. On a complex pharma or biotech case these things matter. So when one introduces a procedure which makes it easier for third parties to attack patents there will be a lot of new implications. It is going to potentially mean that innovator companies will spend more resources defending patents. How that affects the bigger healthcare landscape is unpredictable, but there will be winners and losers.

Meldrew said...

Anonymous 9:22 said

Still, it looks like pharmaceutical companies would better opt-out their European patents out of the European UPC system when it finally gets here, otherwise this would happen to their European patents as well.

As though opposition to European patents was unknown. The opposition rate in pharmaceuticals is just short of 10%, way above the average for all technologies of 4.5% (but still a long way behind food chemistry at 15% - its a hard life in confectionery).

At the expected price of revocation actions before the UPC, and the liability for (capped) awards of costs, I think I will keep my manipulation before the relatively inexpensive EPO. Now pass me a list of pharmaceutical patents issued this month and I will see which ones make a tempting target for shorting.....

Of course for those who like a double hit, shorting, opposing, cashing in, watching the price recover, shorting again and filing a revocation action gives the opportunity for two slices. Who is feeling brave?

Anonymous said...

Anonymous @12:16

This IS pure gaming of the system. That the ends match the desired ends of the anonymice matters not at all in consideration of the means to those ends. IN any (and all) areas of law, such matter.

What is wrong with those means? What is wrong in presenting facts and arguments to the patent office that may have been overlooked during the examination process? What is wrong in ensuring the revocation of a patent that should not have been granted?

What appears to irk you is that these parties appear to have found a way to obtain financial profit from an action that is salutary and hygienic. And yet, there is nothing wrong with that, and performing due diligence on the actual value of the patents that represent the principal assets in the companies whose shares you trade hardly amounts to "gaming the system". They are just seizing the opportunity created by investors who didn't have a hard enough look at those assets before putting their money in those companies.

Suleman Ali :

One must consider the costs of defending patents in IPR. The smaller guys are not going to be able to defend with the same resources as the bigger guys. They won't be able to find all the documents that support their position, generate data, consider all the amendments.

Following that logic, we may as well do without patent examination altogether: after all, many even smaller guys are also deterred from taking the patent route altogether on the basis of its cost.

Economically, this argument is very weak: after all, the party shorting the stock and filing the IPR should not stand to win more money than what the market expects the patent owner to earn from the patent. This means that, theoretically at least, the IPR should be worth as much to each side and its backers. And, in my experience, having a patent revoked requires a lot more resources in terms of researching the prior art and presenting your arguments than obtaining its maintenance.

Moreover, shorting is a risky strategy: the potential losses are unlimited, because while the value of a stock cannot sink lower than zero, there is no limit whatsoever to how high it may soar.

In practice, I wouldn't adopt this strategy unless I was pretty certain that the IPR is going to be a slam-dunk...

Anonymous said...

@Anonymous of 12:16:
This IS pure gaming of the system.

I don't see how it is "pure gaming of the system" if a smart investor realises, on the basis of public knowledge, that the patent portfolio of a particular company is overvalued and for that reason decides to short that company.

@Suleman:
I don't think it is as simple as saying that everybody benefits from bad patents being revoked.

The proprietor of the bad patent does not benefit, but he was not entitled to any benefit in the first place,

One must consider the costs of defending patents in IPR. The smaller guys are not going to be able to defend with the same resources as the bigger guys. They won't be able to find all the documents that support their position, generate data, consider all the amendments.

If a patent is valid, defending it should be relatively easy. A good patent will speak for itself, no supporting documents needed. The attorney only needs to keep the examiner or judge on the right track.

If a patent is not valid, there is no legitimate reason for it to remain in existence, however tiny the patentee and however big the attacker.

A patent may reward hard work, but it is not hard work but the (new and inventive) invention and its disclosure to the public that deserves the patent. So the little guy that spent blood, toil, tears and sweat (and money) on his patented invention has no legitimate right to complain if that invention turns out to be anticipated by a master's thesis from an obscure university in Mongolia. Basically, he simply gamed the system and lost.

Anonymous said...

Wadrinscar says:

I suspect that those doubting the use of I-PR to play the shorting game are ascribing too much knowledge to the traders on the stock markets.

The strength or otherwise of the case behind the I-PR is not the issue. The stock-market traders will not spend time on getting a professional opinion. They live on being the fastest to react to rumours.

What they would see is a well-publicised story that "DrugCo's blockbuster drug patent (may) NOT (be) VALID". DrugCo's share price already factors in the future value of the patent monopoly. A question is raised over the monopoly, so its perceived value falls and traders sell the shares off - resulting in a drop in share price of maybe 10-20% on a time-scale of 10-20 minutes. (I've seen a false rumour do this to tech shares I've owned)

The I-PR "troll" has set up the shorting arrangement, and cashes in once the price has dipped. DrugCo may well be able to defeat the I-PR and regain its share price in a few days or a few months, but the troll has made his money and moved on, long before. All well worth the cost of a straw man filing for the Review at the appropriate time.

"A lie can be halfway round the world before the truth has got its boots on" - Pratchett, from trad.

Anonymous said...

All well worth the cost of a straw man filing for the Review at the appropriate time.

The term "straw man" incorrectly suggests that it would be illegal for someone to short a company's stock today and file an opposition or IPR against a patent of that company tomorrow.

Anonymous said...

Perhaps my Anonymice friends lack a sophisticated (or jaded) view of reality. Perhaps they have not been in the "real" business world.

Too many are having too difficult a time of seeing something that is too easy to miss.

But Wadrinscar captures the essence of the problem readily - and explicates why game playing is what the case is actually about.

Well done Wadrinscar.

Anonymous said...

Wadrinscar, I'm sure that there are many, many traders who buy and sell stock on mere rumours, without looking much into the underlying assets. I think there is a technical term for such traders: "suckers".

Traders who "live on being the fastest to react to rumours" completely deserve to be taken to the cleaners. They forget the basic principle of business: "Caveat emptor".

(I've seen a false rumour do this to tech shares I've owned)

Launching false rumours to drive stock prices down is stock manipulation, because there is information assymmetry (you know the rumours are false, but the other traders don't). This is not the case of our IPR jockeys: all the necessary information is publically available.

Eventually, the traders that fall into this ploy will painfully learn that an IPR does not necessarily mean the end of a patent, just as they should learn that a patent is a fragile asset to start with. Market values will adjust accordingly, just as they should. Patent portfolios have been badly overvalued for a while because of the high cost of contesting even a manifestly invalid patent.

As for Anonymous@05:59, people who have been in the "real" business world are all too aware of the serious damage that can be caused by a manifestly invalid patent.

Ron said...

In the 1970's I remember being told that a practice of the courts and the Patent Office only issuing decisions of patent litigation after the London Stock Exchange had closed for the day, had been adopted because of the (usually) short-effect on the share price of the losing company when decisions were issued while the Stock Exchange was still open and before the brokers had had time to properly digest the consequences of the judgment. In most cases the share price returned to normal when the brokers realised that the decision had a minimal effect on the company's overall profitability, and allowing time to digest the situation overnight prevented the knee-jerk reaction effect on the share price.

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