Kyle Bass, founder of Hayman Capital, in a presentation on January 7th in Oslo, Norway announced that he will be challenging big pharma's patent assets. Mr. Bass said he will be targeting 15 firms with a combined market value of $450 billion. The process he will use to invalidate patents is called an Inter Partes Review (IPR), which was created as part of the America Invents Act in 2011. IPRs were not available to be filed until September 16, 2012. The process has been called a "death squad" by former Chief Justice Randall Rader, as early results were decisively ruling against patent owners. Recent decisions have started to swing the pendulum closer to the middle.
Inter Partes Reviews are meant to be a cheaper and quicker option to challenge a patent's validity instead of going through the court process for a defendant. A defendant is required to file an IPR within one year of a case being filed in the District Court against them.
Over the past two years, there have been a number of third parties getting involved in the process to either circumvent the one-year time bar or to "shakedown" the patent owner. Patience Haggin from The Recorder covered two of the third party challenges. Mike Farmwald's and RPX's (NASDAQ:RPXC) challenges against ParkerVision (NASDAQ:PRKR) might be the closest comparison to Bass, as Farmwald has been a long-term critic of ParkerVision and has previously disclosed short positions in articles he has authored.
I believe Kyle Bass's announcement is taking the reviews to the next level. The prior examples were third parties getting involved with non-practicing entities (NPEs). Now, we have a financial entity with unquestionable motives directly planning to challenge operating company patents and possibly create huge profits.
How does an IPR work?
The IPR is a mini trial to find if the patents are valid or not. The trial is supposed to be completed within 12 months.
1. An IPR will be filed by a petitioner at the Patent Trial and Appeal Board.
2. Within three months, the patent owner has the opportunity to file a preliminary response.
3. The PTAB then has three months to decide if they should institute the review.
4. If instituted, the patent owner has three months from institution to file a response and motion to amend claims.
5. The petitioner will then have one month to file a response and opposition to any amendments.
6. The patent owner will have one month to reply to the opposition to amend.
7. An oral hearing will be set on a request by either party.
8. A final written decision is due three months after the oral hearing.
9. The final written decision can be appealed to the Federal Circuit*.
* The appeal will likely add another 12 months of time for a final decision.
What to expect:
Inter Partes Reviews are not widely followed by the mainstream press and have mostly been covered by the legal community or investors in patent related investments. I expect the following:
1. The IPR will be filed on the PTAB web portal.
2. The filing and company targeted will likely be provided to a media entity to disseminate the news. A very negative headline will hit a news service such as Bloomberg. The initial filings are difficult to track.
3. Depending on the size of the company and the sales of the drug the IPRs are targeting, there could be a sharp move to the downside. The number of investors who know what an IPR is and the ramifications are very small. For some of the smaller targets that rely on a handful of drugs the move could be exaggerated as investors panic.
4. Investors will have 12 months from the filing to start handicapping outcomes and there could be further volatility as the final decision approaches.
I predict the eventual IPR filings to be a well-covered event by the mainstream press rushing to figure out exactly how the IPRs work. I recommend investors to identify potential holdings that might be targeted by Bass and develop a plan of action if in fact they are targeted.
While patent reform was scrapped in 2014, the prevailing opinion by the legal community is more reform will be passed in 2015. With Bass's announcement, I expect the pharma companies and lobbyists to play a very important role in future reform hearings.
Generics should be the largest beneficiaries if the drug patents are invalidated.
I also expect similar attacks on US technology companies in the future. The IPR challenges are a much cheaper option to invalidate patents than to sign nine figure patent licenses with the Apple and Microsofts of the world.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not a patent lawyer. Please consult a legal professional.