The U.S. Supreme Court is grappling with whether to declare a patent review system established under a 2011 law unconstitutional in another case that has pitted brand-name drugmakers against their generic competitors and some of the biggest players in the high-tech industry, such as Google Inc. parent Alphabet Inc.
The high court, which heard oral arguments Nov. 27 in the case, is weighing whether trial proceedings convened by the Patent & Trademark Office's Patent Trial and Appeal Board, or PTAB, violate patent holders' rights to a jury trial under the U.S. Constitution.
The dispute is over Oil States Energy Services L.L.C.'s patent on its wellhead equipment used in hydraulic fracturing, or fracking. But the battle at the Supreme Court has broad implications for multiple industries, including the biopharmaceutical sector.
The PTAB's so-called inter partes reviews, or IPRs, were created under the America Invents Act, or AIA, of 2011 as a faster and more affordable way for third parties to challenge patents than going through the U.S. court system.
The PTAB also administers two other types of post-issuance review proceedings created by the AIA: a transitional program for covered business method patents and post-grant reviews.
But it was the IPRs that quickly grew in popularity — an outcome even the patent office acknowledged it did not expect. The proceedings also became controversial because of the high rate of patents that have been overturned by the PTAB.
As of Oct. 31, more than 7,000 IPRs had been filed with the patent office. PTAB has granted about two-thirds of the petitions it has received and has declared at least one patent claim unpatentable 82% of the time.
When Congress passed the 2011 patent law, the drug industry praised it as a much needed and welcomed reform.
But the big lobbying groups for innovator drugmakers, the Pharmaceutical Research and Manufacturers of America, or PhRMA, and the Biotechnology Innovation Organization reversed course after several of their members, such as AbbVie Inc., Acorda Therapeutics Inc., Biogen Inc. and Bristol-Myers Squibb Co., were hit hard by the PTAB rulings.
A key issue in the high court case is whether patents granted by the patent office are personal property, whose ownership can only be disputed in court, or public rights, which can be revoked by the government.
"From the earliest days of the republic, courts and Congress understood that issued patents are property — just like granted rights in land and chattels — and must be protected as such," PhRMA argued in an amicus brief to the court. "Whatever leeway Congress has to dictate the terms on which patents issue, cancellation and invalidation of already-issued patents must conform to the requirements applicable to private property."
Abuse of the system
The IPRs initially were embraced as a way to avoid the time and expense of legal battles brought by entities that acquire patents for the sole purpose of forcing companies to pay licensing fees or settling infringement suits through threats of aggressive litigation — dubbed patent trolls.
But the biopharmaceutical innovators complained the IPR system soon was being abused by hedge fund managers like Kyle Bass, chief investment officer at Hayman Capital Management, and the Coalition for Affordable Drugs he created. Drugmakers accused Bass of using the system to try to short stocks in what they called a reverse-trolling scheme.
"Having established a short position, the hedge fund then publicly files an IPR petition against the company's key patent," the Biotechnology Innovation Organization explained in an amicus brief filed with the Supreme Court. "Because most IPRs result in the invalidity of the patent, the company's stock may fall precipitously as a result of the filing of the petition. The hedge fund is able to earn a substantial profit on its short position. The profits are immediate, and the hedge fund need not even go forward with the IPR."
"The end result is that patent owners are threatened with the very abuses that the AIA was enacted to remedy," the group argued.
But in its brief to the court, Apple contended that the core benefit of the IPR system is that the placement of authority for remedying certain errors in the issuance of patents resides with the very agency that made the mistake in the first place.
Justice Ruth Bader Ginsburg agreed with that sentiment, insisting the patent office must have a way to correct its own errors.
Generic drug companies have seen great success in using IPRs to invalidate patents.
"The system has become clogged with a glut of patents that fail to meet the statutory standards for patentability, which should never have issued," Mylan NV declared in a brief to the court.
Brand-name pharmaceutical manufacturers have "powerful economic incentives to obtain and use these weak patents to maximize their monopolies," the company said.
Lopsided
But PhRMA called the IPR procedure "extraordinarily lopsided."
Oil States pointed out that even the PTAB chief administrative judge in 2014 acknowledged the board had been labeled as a "death squad" by critics.
"If we weren't, in part, doing some death squadding, we would not be doing what the statute calls on us to do," the judge said.
"Not surprisingly, inter partes review has done just what it was designed to do — invalidating nearly 80% of the patents in the cases it adjudicates," Oil States said in an August brief filed with the Supreme Court.
Chief Justice John Roberts said the government giving with one hand but taking away with the other struck him as "you've got to take the bitter with the sweet" — a proposition he said is generally rejected.
"I'm thinking of the public employment cases, the welfare benefits cases. We've said you cannot put someone in that position. You cannot say, 'If you take public employment, we can terminate you in a way that's inconsistent with due process,'" Roberts said.
But Justice Sonia Sotomayor reasoned the IPR system is saved by the ability of those who lose at the PTAB to appeal those decisions to the U.S. Court of Appeals for the Federal Circuit.
"There's deference with respect to factual matters, but there is de novo review as to legal matters," Sotomayor said.
