The Bass-Spangenberg patent validity attacks: A new patent monetization model. Soon to be expected in Europe under the UPC ?

The activities of non-practicing entities (NPE´s; by some referred to as “patent trolls”) trying to make money by acquiring and enforcing patents against third parties are still very controversially discussed in the US as well as in Europe. Taking up criticism that NPE´s would threaten innocent operating companies with enforcement of allegedly invalid patents, in early 2015, well-known hedge-fund manager Kylie Bass together with IP expert Erich Spangenberg devised a new patent-monetization strategy based not on patent enforcement but on challenging the validity of essential patents of target companies in the pharmaceutical area. Putting into place an aptly named “Coalition for affordable drugs” (CFAD), they targeted high-priced patented drugs. The strategy is to look for publicly traded pharmaceutical companies the value of which is substantially dependent on a low number of patents which, based on a first analysis, have questionable validity. Then they challenge the validity of these patents by way of the newly introduced, allegedly fast and low-cost (compared to a full patent trial in the US) inter partes review (IPR) process at the Patent Trial and Appeal Board (PTAB) of the USPTO, which had quickly gained a reputation of high invalidation rates. To make sure that – besides the effect of reduced prices for the patented drugs in case of success – the fund investors receive a return on investment, Bass and Spangenberg short-sell stock of the targeted pharmaceutical companies. In case the attacks on the validity of the patent(s) of such company create considerable uncertainty in the financial markets, this results in falling stock prices and thus profits for the investors. How successful the strategy turns out to be in the courtroom cannot yet be judged, since the 30 initiated IPR proceedings (by 18 December 2015) all started only in 2015 and are still pending, but it certainly was big news in the US IP monetization community. The pharmaceutical industry understandably is less enthusiastic.

There is already speculation to extend this patent monetization strategy to companies outside the pharmaceutical industry. A company qualifies as a potential target for a Bass-Spangenberg attack if the following requirements are fulfilled:

  • The company is publicly traded and is large enough that a liquid market of its stock exists
  • The validity of one or a small number of patents has large impact on the overall (future) profits of the company and therefore its share price
  • The validity of these patents is questionable

The second requirement apparently rules out most companies in the telecoms area, as the validity of a single patent has not much effect because products and services in these technologies typically use hundreds or thousands of patents. Sadly, innovative enterprises heavily relying on a single or a small number of patented products are particularly vulnerable.

One precondition for this strategy was the novel availability of a relatively fast and low-cost stand-alone (i.e. independent of an infringement lawsuit) inter-partes procedure to challenge the validity of a granted patent. Such proceedings, however, are long established in Germany as well Europe-wide in the form of opposition or nullity proceedings. Thus, the strategy should in principle work on this side of the Atlantic, too. While the German market alone may be too small to sufficiently affect the share price of generally globally acting pharmaceutical company, a patent loss with effect for Europe as a whole should be sufficient to have a visible effect on share prices. Opposition procedures have the disadvantage of the strict nine-month deadline after publication of patent grant such that patents in later stages (which often are the more profitable ones) can only be attacked in various national courts.

Here the UPC may provide a new opportunity to patent validity challenge investors. The validity of European patents, which have not been opted out of the UPC, can be attacked in with single action before the central division of the Unified Patent Court. The court practice and the invalidation statistics are of course not yet known. But at least there could a great potential for creating uncertainty, which alone can drive down share prices. Such uncertainty is only reinforced by the considerable publicity to be expected for earlier important cases under the new UPC.

Companies considering itself possible targets of such central invalidity attacks could avoid these by making sure to opt-out from the UPC its essential patent rights from the first day the UPC enters into force, since after an invalidation action has been launched against a patent, opting out this patent is no longer possible. In order to make sure that the opting out takes effect right with the UPC coming into force a so-called “sunrise period” has been introduced, allowing patentees to file requests for opt-out before the start of the UPC, having effect on its first day of operation.

Why patents are still needed: A response to the title story “Set innovation free!” published by the Economist on 8 August 2015

The Economist published in this week´s issue (8 August 2015;  a cover story consisting of an editorial and a more detailed article challenging the effectiveness of the patent system to achieve its purpose, namely to foster innovation. As reasons for this failure the newspaper cites the abuse of the system by so-called “patent trolls” threatening businesses with lawsuits based on dubious patents and the alleged skills of patent lawyers to obscure rather than to disclose to the public the inventions protected by the respective patents.

As empiric evidence in favour or against the effictiveness of patents is notoriously hard to come by, the Economist concludes: “But a top-to-bottom re-examination of whether patents and other forms of intellectual-property protection actually do their job, and even whether they deserve to exist, is long overdue.” In the meantime the Economist suggests to reduce patent lifetimes, in particular in fast-moving technical areas as computer technology, and to run experiments with other forms of financing innovation alongside the patent system. While the former would deprive of protection inventors being ahead of their time such that their inventions become commercially relevant only towards the end of a patent´s 20-year lifetime, the latter suggestion surely sounds like a good idea. Governments could increase funding for reasearch (e.g. into drugs against rare diseases, which are not profitable for pharmaceutical companies) and publish the results without filing a patent application, thus handing over the publicly financed innovation to the public domain. This, however, can be done without any change of the current patent system.

In the discussion of the pros and cons of patents, however, I always and in this article in particular miss one point, namely the capability of patents to transform innovation into a defined, tradable asset.

Patent attorneys do the work of dissecting innovation into defined, manageable pieces and the examiners at the patent offices do the work of verifying whether or not a claimed invention is really new and non-obvious. Without patents, innovation can come only in two forms, either being published and thus part of the public domain and no longer a tradable asset, or kept secret by the innovator. A transaction to sell such kept-secret innovation would be enormously complex as the work to define the parts of the innovation/new technology being subject to the transaction and the work to value it would have to be done from scratch by the transaction parties thermselves, and without the help of patent databases. The information asymmetry between the innovator and potential technology seller keeping the secret about the (allegedly) newly developed technology and the potential technology buyer having no such knowledge would complicate things further.

Without patents, innovation would thus be a largely illiquid asset. For the economy as a whole the costs of the illiquidity of new technology as an asset would in my view by far outweigh the costs associated with patent lawsuits, in which only a tiny proportion of all granted patents are involved. I had expected that in particular the Economist, an outspoken supporter of free trade, would have taken into account this vital role of the patent system.