The Patent Troll Threat To Pharmaceutical Companies

In recent months patent litigation abuse by so-called “patent trolls” has gotten the attention of lawmakers, state attorneys general and even President Obama, who called for patent litigation reform during his State of the Union address. And, while the primary targets of such litigation abuse so far have been technology companies, a recent study cited in Law360 warns that in the absence of patent reform legislation, patent trolls will soon set their sights on bio-pharmaceutical companies.

Background

The Patent Troll Dilemma

Patent trolls, which are also known as “non-practicing entities” (“NPEs”) and “patent assertion entities” (“PAEs”), aggregate portfolios of patents for the sole purpose of asserting them against companies that the trolls have determined make products that infringe the patents they have acquired — or, at the least, have determined that there is a colorable basis to assert infringement.  The trolls have no products and acquire the patents from their owners with no plan to commercialize them; instead, their goal is to extract licensing fees from the target company or companies.  If successful, the troll usually splits the licensing revenue with the inventor and pays a certain percentage to the law firm that issued the demand letter and/or filed suit.  Because patent suits are expensive to litigate, a great many target companies give in and pay the trolls a licensing fee instead of litigating — only to get another demand letter on a different patent and (maybe) on a different product in a couple of years (or even months).  The cycle continues and the trolls make a lot of money.

The problem most people have with patent trolls is the virtually undisputed evidence that patent troll infringement claims cost the U.S. economy billions of dollars. In fact, one study claimed that in 2011 companies spent $29 billion defending against patent troll suits.  The fact that the majority of such suits target small and inventor-driven companies and are increasingly targeting end users of products, including many small businesses, have raised the ire not only of the business community, but of the FTC, Congress, State legislatures and attorneys general, and the White House.  As a result, a number of measures aimed at curbing patent troll litigation have either been enacted or are currently pending, including:

  • The Innovation Act of 2013, which passed the U.S. House of Representatives 325-91.  The bill 1) requires that a complaint be accompanied by a chart explaining “with detailed specificity, how the terms in each claim . . . correspond to the functionality of the” product accused of infringement; 2) directs the court to award, to a prevailing party, reasonable fees and other expenses incurred by that party unless the court finds that the position of the non-prevailing party or parties was substantially justified or that special circumstances make an award unjust;” 3) disallows discovery until after a claim construction ruling; and 4) allows a defendant to join any party with a financial interest in the patent(s) at issue.
  • The Patent Transparency and Accountability Act of 2013.  Pending in the U.S. Senate.  The bill includes a “real party” in interest provision and recourse from the FTC for bad faith demand letters.
  • The “Transparency in Assertions of Patents Act of 2014. Introduced in the U.S. Senate on February 26th. The newest Senate bill empowers the FTC to promulgate and enforce rules prohibiting patent trolls from issuing demand letters constituting unfair or deceptive acts within the meaning of the Federal Trade Commission Act  In addition to requiring the FTC to issue and enforce a host of rules regarding a) specificity of the alleged infringement, b) disclosure of other parties in interest and c) information about the patent(s) in suit, the proposed bill also allows for state attorneys general to file civil suits against patent trolls in federal court — a measure supported by more than 40 states.
  • State anti-patent troll legislation.  Enacted in Vermont and similar legislation is pending or being considered in Nebraska, Oregon and Kentucky.
  • White House executive actions.  A host of such actions were recently enacted aimed at improving patent quality (e.g., through more technical training for patent examiners), disclosing real parties in interest, and providing small businesses accused of infringement with resources to combat patent trolls, including enabling such businesses to pool resources in a joint defense through a new website:  www.uspto.gov/patentlitigation.

In addition to all of the above, the U.S. Supreme Court recently heard oral arguments in two patent cases that could also make life tougher for trolls.  The issues in Highmark Inc. v. Allcare Health Management Systems, Inc. and Octane Fitness LLC v. Icon Health & Fitness Inc., involve the standard for fee-shifting under Section 285 of the Patent Act and whether the standard for reviewing attorney’s fee awards by the Federal Circuit should be changed from de novo review to one of deference to the district courts’ findings.  Under the current standard, courts can only shift the prevailing party’s fees to the non-prevailing party in “exceptional” cases, which the Federal Circuit has construed as “objectively baseless” suits “brought in subjective bad faith.”  Should the Court decide to relax this onerous standard and make it easier to shift attorneys’ fees to the losing party, the conventional wisdom is that patent trolls will think twice before filing suit on a weak patent and risk paying the accused infringer’s attorney fees, especially if they know they will not get de novo review at the Federal Circuit.  However, even if the Court were to change the current standards in favor of the prevailing party — an iffy prospect based on the Justices’ seemingly divided comments during oral argument — the outcome will probably have very little effect on troll behavior, since only a small fraction of patents asserted by trolls result in litigated verdicts.

The Implications For Pharma

Patent litigation reform, or the lack thereof, may have significant implications for the pharmaceutical industry.  According to a study published last month and reported in Law 360, while patent trolls have so far wreaked havoc only on technology industries like software, the bio-pharmaceutical industry may very well be next.  Attacking the conventional wisdom that patent trolls are not interested in drug patents because they are too expensive to develop and acquire, the study’s authors noted that trolls have been increasingly acquiring and asserting patent portfolios from research universities, which the authors contend represent a potential gold mine for trolls who possess the sophistication and expertise to exploit these massive and relatively untapped patent resources.  To prove their thesis, the authors surveyed the patent holdings of four universities that had the highest number of patents issued in fiscal year 2011: the University of California, the University of Texas, MIT and  CalTech.  They also surveyed the holdings of the University of Southern Florida, which was among the top 10 universities in 2011 patent grants with the lowest ratio of license revenues to research expenditures.  According to the authors, their relatively non-intensive search found dozens of potentially assertable patents covering 1) drugs’ active ingredients; 2) methods of treatments; 3) screening methods for identifying new drug candidates; 4) dosage forms; and 5) other ancillary technologies.  The authors concluded that, unless patent litigation reform is enacted at the federal level, pharmaceutical companies are at serious of risk of being targeted for abusive patent troll litigation.

Observations

Although the focus of the study was on the patent troll risk to bio-pharmaceutical companies, the authors noted that trolls have also been aggressively acquiring patents impacting medical device and other healthcare companies, making patent litigation reform a seeming imperative for all life science industries.  The good news for life science and beleaguered technology companies is that the political will to put the brakes on at least the worst kind of patent litigation abuse appears to exist on both sides of the political aisle.  However, until a federal law is enacted — and until we see how much “reform” has been included — it is far from clear that the trolls’ days are numbered.  In fact, as long as it is possible for an entity without products to assert patents it owns against an entity that makes products, the troll problem will never go away entirely.  That’s because the risk to the troll or NPE is limited to money, as measured by the cost of the litigation it is bringing.  The the troll’s target risks not only defense litigation costs, but possible damages and lost sales from a finding of infringement.  In other words, only practicing entities (i.e., those that make products) are correctly incentivized and disincentivized in a properly working free market to file a patent infringement suit against a potential infringer, since the risks and costs are the same for both sides.

While it may be somewhat extreme to bar NPEs like a university from ever asserting a patent against a potential infringer, there is something wrong with companies that don’t invent, don’t patent and don’t make anything of value,  but yet go after companies that do all these things — and that’s even before we get to the damage they do to the economy.  While much of the proposed federal legislation is long overdue, at the end of the day, it may still not be enough.

About José P Sierra

José Sierra is a partner at Laredo & Smith, LLP, in Boston, which provides respected advice and creative representation in business litigation, white collar criminal defense, government investigations, corporate compliance, and business and employment law. Prior to joining the Firm, Mr. Sierra was a principal at Fish & Richardson. Previously, Mr. Sierra was senior vice president, chief compliance and ethics officer for Sepracor Inc., and Kos Pharmaceuticals, and was legal director at Schering-Plough Corporation, and an assistant U.S. attorney in the Newark, NJ U.S. Attorney's Office.

Mr. Sierra's practice focuses on white collar criminal defense, government investigations and corporate compliance. Contact him at 617-443-1100 or via email.

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