Editor’s note: This post is part of a Health Affairs Blog Symposium on Health Law stemming from 4th Annual Health Law Year in P/Review conference hosted by the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics at Harvard Law School. Holly Fernandez Lynch wrote an introductory post in January 2016 and you can access a full list of symposium pieces here or by clicking on the “The Health Law Year in P/Review” tag at the bottom of any symposium post. You can also watch a video of the presentation on which this post is based.
Ever since the first patent was issued in 1790, the United States has had a single patent law to protect inventions in all fields. Over the past three decades, that law has been strained to the breaking point in covering both the life sciences and other technologies.
On the life sciences side, patents protect platform technologies as well as specific products and are important at every stage of a product’s life cycle. Many scientific breakthroughs arise from federally funded research in universities and other institutions. Under the Bayh-Dole Act, these institutions license the resulting patents to companies, often start-ups, which develop the technology until it is ready to be marketed.
During the many years of the development process, companies need to attract investment, and investors often assess the merits of the patent portfolio as an indicator of the ultimate strength of the company. Once a product is released to the market, patents still matter; each day of patent protection for a blockbuster drug is worth millions. Patent litigation in the life sciences is typically between competitors and reflects an effort by one of those competitors to maintain its exclusivity.
Computer-based technologies occupy a different universe. There, every stage of the product life cycle is brief, and many inventions can make it to market without any investors at all. Over the past two decades, this technology sector has been plagued by non-practicing entities (less politely known as “trolls”) that have brought a flood of patent infringement lawsuits against major players in the industry.
Many of these trolls have amassed patent portfolios that are perceived to be of low quality. In enforcing their patents against the industry’s deep pockets, the trolls have capitalized on the rampantly increasing cost of major patent litigation, which can run into eight-figure sums in some cases.
One study concluded that in a single year, patent infringement litigation brought by trolls exacted approximately $29 billion in direct costs such as attorneys’ fees from the defendants. Another study by the same authors estimated the total social cost (not just direct cost) at over $83 billion per year.
The result: a major backlash against patents. While patents were perceived as fostering innovation in the 1980s and 1990s, the pendulum has now swung far in the other direction, with Congress and the courts vying to fix the troll problem. Unfortunately, many of these responses have taken a sweeping approach to the patent system, causing substantial collateral damage to life science patent portfolios.
The Patent Trial And Appeal Board
One of these responses was the creation of a new tribunal, the Patent Trial and Appeal Board (PTAB), within the Patent Office. The function of this tribunal, established by the America Invents Act, is to provide a fast-track pathway to challenge the validity of questionable patents without incurring the costs of full-dress patent litigation.
By some measures, the PTAB has been singularly successful. The former Chief Judge of the U.S. Court of Appeals for the Federal Circuit, the appellate court that hears appeals in patent cases, referred to the PTAB as a patent “death squad.” Although the PTAB’s statistics can be hard to fathom, one reviewer, assessing the early returns, found that the PTAB cancelled 95.2 percent of claims it agreed to review.
More recent statistics show that, in the most common type of patent challenge (the inter partes review, or “IPR”), the PTAB cancelled at least some of the challenged claims in 87 percent of its final written decisions. By contrast, in district court infringement litigation, patent owners have a close-to-even chance of winning.
Despite the PTAB’s fearsome record, the new proceedings available to patent challengers have not curbed the rate of troll litigation, which has continued unabated. And many asserted patents have not been challenged in the PTAB — although an overwhelming majority of patents challenged in the PTAB are also the subject of district court litigation, which may or may not be stayed during the PTAB’s administrative process. Thus, at least so far, the PTAB does not appear to have provided relief to the computer and communications industries, and in some cases, it has raised the cost of fighting troll patents by adding a new front to the war. In fact, further legislation designed to attack the troll problem is currently pending in both houses of Congress.
To date, only 8 percent of IPRs have been brought against patents in the biopharma space. But some of these have inflicted real damage. Hedge-fund manager Kyle Bass has teamed up with patent troll Erich Spangenberg to form the Coalition for Affordable Drugs (CFAD). CFAD challenges biopharma patents while Bass shorts the stock of the patent owners. Bass has filed multiple petitions challenging valuable patents owned by Fresenius, Biogen, Celgene, Jazz, Shire, Acorda, and others. The possibilities for mischief don’t end with stock shorting. Patent owners worried about even a small chance that their patents could be revoked are easy prey for trolls.
The Life Sciences Industry Responds, To No Effect
The life sciences industry has been deeply disturbed by these developments, particularly because both the Hatch-Waxman Act (for generic small molecule drugs) and the Biologics Price Competition and Innovation Act (BPCIA) (for biologics) already provide pathways for generic or biosimilar manufacturers to challenge patents standing in their way before launch of the generic or biosimilar drug. And unlike the IPR process, these pathways allow a comprehensive challenge to a patent, while a challenger bringing an IPR can only make arguments that the invention was not novel or was obvious based on the existing literature.
The industry, in alliance with major research institutions, has pushed proposed legislation designed to change the PTAB’s procedures and substantive rules to make them less hostile to patent owners. It is unclear whether these changes would eliminate the disruption that speculative patent challenges have inflicted on the industry.
Over the summer of 2015, the industry’s major players proposed a more radical solution: to exempt patents already subject to the patent challenge provisions of Hatch-Waxman and the BPCIA from the IPR process entirely. If such an exemption were created, it would represent a new departure from the unitary patent laws applicable to all technologies, that the United States has maintained since the 18th century. While scholars can debate whether it is good or bad to develop separate patent regimes for different technologies, the issue will remain an academic one, at least for the moment.
A group of senators asked the Congressional Budget Office (CBO) to determine how much the proposed IPR exemption would cost. And in a “private” analysis, CBO estimated that the IPR exemption would increase Federal spending by $1.3 billion dollars because it would delay the launch of certain generic products. The potential impact on the Treasury had the predictable effect of casting the IPR exemption onto the political third rail. Further compromises have been floated, but progress has halted.
So a “private” analysis has essentially halted public discussion of the proposed IPR exemption, and members of the public cannot assess the accuracy of the CBO’s prognostications. And so we are keeping our unitary patent system by default.