04 Feb Inter Partes Review (IPR): Hate the Game Not the Player
Inter Partes Review (IPR) – Hate the Game, Don’t Hate the Player – a loophole in IPR rules allows uninterested parties to file IPRs for questionable reasons.
Several IP blogs and news websites have recently commented on an Inter Partes Review (IPR) proceeding involving an investment fund controlled Coalition and its use of the IPR process to manipulate stock prices. See, e.g., IPWatchdog.com; BusinessInsider.com; PharmaPatentsBlog.com; and The Wall Street Journal.
The Inter Partes Review (IPR) process allows a petitioner to file a request with the Patent Trial and Appeal Board (PTAB) to cancel one or more claims of an issued patent as being unpatentable over the prior art (IPR Information). In the IPR process, a petitioner files a request for an IPR, and the PTAB reviews the request and makes a decision whether to grant the IPR. If granted, the PTAB mediates the dispute between the petitioner and the patent holder to determine whether the patent should be invalidated.
In July of 2015, Celgene Corporation, a patent holder, filed a motion for sanctions against the Coalition for Affordable Drugs VI LLC, a petitioner, for abuse of the IPR process. In case you have not been following the story, the Coalition for Affordable Drugs is a wholly owned subsidiary of Hayman Credes Master Fund, L.P., which is alleged to be controlled by Kyle Bass through a series of investment firms. The patent holder alleged that the IPR filings are part of a larger strategy of short-selling and stock acquisition that benefits the investment firm’s capital management business. The Coalition admitted (in their opposition to the motion for sanctions) that the IPRs are part of its investment strategy, which includes filing an IPR challenging the validity of a patent, and then either shorting the stock of the company owning the patent or buying shares in companies that would benefit if the patent claims are invalidated through the IPR process. In either case, the investment firm’s clients benefit. It is certainly a creative strategy.
On September 28, 2015, the PTAB ruled that IPR filings by the Coalition for Affordable Drugs did not abuse the IPR process. See, e.g., the PTAB’s Decision Denying Sanctions Motion under 37 C.F.R. § 42.12 dated September 25, 2015 in Case IPR2015-01092 (Patent 6,045,501); Case IPR2015-01096 (Patent 6,315,720); Case IPR2015-01102 (Patent 6,315,720); Case IPR2015-01103 (Patent 6,315,720); and Case IPR2015-01169 (Patent 5,635,517) (PTAB IPR Search).
Since the Coalition for Affordable Drugs is controlled by an investment firm which controls the timing of the IPR filings, the timing of the stock trades, and the timing of his press releases announcing acceptance of the IPR by the PTAB, this technique seems like a form of price manipulation. However, the IPR/investment strategy does not fit the definition of manipulation as provided by the Securities and Exchange Commission:
Manipulation is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security. Manipulation can involve a number of techniques to affect the supply of, or demand for, a stock. They include: spreading false or misleading information about a company; improperly limiting the number of publicly-available shares; or rigging quotes, prices or trades to create a false or deceptive picture of the demand for a security. Those who engage in manipulation are subject to various civil and criminal sanctions. http://www.sec.gov/answers/tmanipul.htm
In light of the SEC definition and the PTAB’s ruling, it appears that the Coalition’s strategy of filing IPRs to manipulate stock prices is allowed under the current rules, and will likely continue.
Should the SEC amend its definition to include this form of stock manipulation? I don’t have experience with SEC law, and changes in such laws may have unintended consequences, but it may be worth considering.