Hedge Fund Manager Kyle Bass Utilizes Inter Patent Partes Review for Unconventional and Controversial Purpose

J. Kyle Bass is known to many as the one of the few that made a fortune in the financial crisis when his hedge fund, Hayman Capital Management, bet big against subprime mortgages. Now Mr. Bass is betting against pharmaceutical companies that he deems to exploit the patent system by sending their patents to the test, through an inter partes review (IPR).

At the same time, on behalf of themselves and their investors, Mr. Bass and his partner, Erich Spangenberg, are short-sellers of shares in companies whose patents they consider vulnerable, while buying stock in companies whose patents, they believe, reflect true innovation. However, the United States Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board (PTAB) shows no signs of concern pertaining to Bass’s legal maneuvers. Although, in a case brought by Celgene requesting sanctions against Bass’s review requests, the board sided with Bass, who did not deny he might profit from a resulting change in stock price but called it a “truthful irrelevancy.” A panel of judges ruled that “profit is at the heart of nearly every patent and nearly every inter partes review.”

Mr. Bass and Mr. Spangenberg say that their aim is to bring down drug prices that have artificially high prices based on dubious patents. They have even filed patent challenges on a pro bono basis.

“Some patents and extensions to patents represent an unreasonable use of government regulation to enshrine monopoly power to the detriment of the public at large,” Mr. Bass said. “This system must be fixed or we will continue to pay more and more for the same old drugs we’ve been buying for decades.”

Companies try to extend patents on products shortly before they expire, when the door is about to open to generic makers. This practice, called “evergreening” or “product-hopping,” is among the forces keeping drug prices high, experts say.

The two started the Coalition for Affordable Drugs, created to challenge pharma patents, and used the coalition as entity that challenges the allegedly dubious patents.  Mr. Bass said the coalition would not strike a settlement deal in any of its patent challenges.

However, the coalition has so far seen mixed results, with the PTAB denying institution of several of the IPRs they filed. Consequently, the two filed as individuals for their latest two petitions, putting their own money behind the claims, for patents owned by companies that they do not have any stock in, hoping to see whether the PTAB will treat petitions differently when they do not come from a hedge fund.

It will be interesting to see what happens with the newly filed petitions and whether or not Spangerberg is right when he said “Without the noise about our lack of altruism raised by branded drug companies … we are curious if the PTAB will do its job.”

New patent owners not only have to watch out for infringers trying to invalidate their patents, but also Hedge fund managers trying to make a buck.