Overview
Recently, activist investors have been utilizing the new inter partes review (IPR) process from the American Invents Act (AIA) to put pressure on stock prices of public companies that heavily rely on patent protection. By attacking the underlying patents that protect a current or future product, an activist investor can put immediate pressure on a company's stock price. If the activist investor is shorting the stock, which is often the case, the activist has a potential to generate considerable gains. These types of actions by activist investors differ substantially from activism related to mergers and acquisitions or corporate structure and therefore requires a unique response plan.
Examples of recent IPRs by activists include at least 16 IPR petitions filed by the hedge fund "Coalition for Affordable Drugs" led by activist investor, Kyle Bass. The Coalition for Affordable Drugs has, inter alia, challenged patents owned by Jazz Pharmaceuticals related to Xyrem, Jazz's drug for narcolepsy as well as Acorda Therapeutics' drug AMPYRA used to improve walking speed for patients with multiple sclerosis. Each of the petitions filed by Mr. Bass' group, all filed in 2015, target the drug that accounts for a large portion of the company's annual revenue.
Early in 2015, Congressman Bob Goodlatte (R, VA) introduced H.R. 9 - Innovation Act, into the House Judiciary Committee. The bill was meant to reduce abuses in the patent litigation system as well as those related to AIA challenges, such as described above. Congressman Goodlatte also introduced an amendment to the bill that specifies that no petition shall be instituted unless the petitioner certifies that the petitioner and all real parties in interest:
- do not own a financial instrument 20 described in sections 316(a)(15) and 21 326(a)(14) of title 35, United States Code, as added by paragraphs (1) and (2), during the one-week period following the date on which the petition is filed; and (ii) have not demanded anything of value from the patent owner or an affiliate of the patent owner during the period between September 16, 2012, and the date of the filing of the petition.
This amendment was not met by broad support by the committee as some believed that it did not do enough to protect the bio-pharmaceutical industry while others proposed striking the provision from the bill altogether. While the legislation has now been referred out of the committee to the House for consideration, the House Judiciary Committee acknowledged that more work was needed before passing the bill into law.
The purpose of this top ten is to provide an overview on how to prepare, react and respond to an IPR by an activist investor. Since the implications of such an IPR go far beyond the legal department, in-house attorneys need to be ready to prepare and guide the company throughout the IPR process. Therefore, this list can serve as a process checklist for in-house attorneys working with the executive management team to address an IPR.
1. Know the IPR Process
First, you must have a general understanding of IPRs if you do not already. The IPR process is still relatively new and the full extent of the new process is still being tested with new filings. Additionally, unlike traditional patent litigation, the IPR process moves quickly and extensions of time are generally not available as the entire procedure must be completed within 18 months. The fundamental elements and timeline for an IPR are as follows.
Patentability may be challenged in an IPR only on a ground that could be raised under 35 U.S.C. §§ 102 (novelty) or 103 (obviousness), and only on the basis of prior art consisting of patents or printed publications. The Patent Trial and Appeal Board (PTAB) will institute an IPR if it finds a reasonable likelihood that the petitioner would prevail with respect to at least one challenged patent claim, and a final determination by the PTAB will be issued within one year (extendable for good cause by six months). The shortened procedure also allows limited discovery periods for both the petitioner and the patent owner. IPR is available for a patent issued at any time but cannot be sought until after the later of: (a) nine months after the issuance or reissuance of the patent; or (b) termination of any Post Grant Review that has been instituted for the patent. If there is a lawsuit, the defendant has one year from service of the complaint to file an IPR.
More information is available from the United States Patent and Trademark Office: http://www.uspto.gov/patents-application-process/appealing-patent-decisions/trials/inter-partes-review.
2. Assess Your Company's Risk for an IPR
The first step is to assess the possibility of an IPR being initiated against one of your company's patents. Depending on your patent or product portfolios, there may not be a high level of concern for your company. For example, if you product is covered by a large multitude of patents, none of which are solely essential or tied to a product with large revenues, the risk of an IPR by an activist may be relatively low.
However, even if your risk for an IPR may appear relatively low based on your patent portfolio, you must also assess the company's risk for an IPR on a broader basis. Therefore you and your investor relations (IR) department must take a step back and consider your company's overall strategy and whether this is consistent with the desires of the shareholders. If there is or could be shareholder discourse, an IPR is one way an activist investor could try to put pressure on the company's board and management.
3. Mitigate Risk or Potential Impact of Any Future IPRs
There are potentially many ways your company can mitigate the potential impact of an IPR. One strategy may be to increase the patent protection around your product or product candidate. However, unless there are easy acquisitions available, the organic development of new patent applications to protect a product may take too long or not be available if the product only relies on one or a few fundamental patents, such as in the pharmaceutical industry. If a patent application is still pending, you can consider separating claims into separate patent applications or amending or cancelling weaker claims that may be more likely to cause an IPR petition to be granted by the USPTO. As IPR petitions are strictly page limited, often patents that contain large claim sets present unattractive targets and are much more difficult to attack in a single IPR petition. This can be advantageous as IPR petitions are costly to prepare and file. The filing fees alone are around $25,000. Thus, having multiple patents that cover a product or a single patent that has many claims may provide some protection, or at least disincentive to attack.
4. Shareholder Engagement
Another risk mitigation strategy is to engage shareholders to address any underlying concerns than may cause them to pursue an IPR, although this is not always possible when faced with groups pursuing IPRs on policy grounds. However, in the case where the attack is from a shareholder, you must work with your IR department to understand the company's shareholder base. You will need to determine whether there are existing shareholders that are activists or whether the IR department has received and inquiries from potential activists.
5. Educate Management
Most likely, your executive management team will not be intimately familiar with IPRs. Therefore, in-house and outside counsel will need to educate management so they have a general understanding of the process, the likelihood of success of any such petition, and potential risks to the company should the petition be successful. They will need to be able to address potential questions from investors so it is vital that they have a fundamental understanding of the IPR process.
6. Have a Plan
Before there is an IPR, your company should have a plan on how to respond for multiple reasons. First, as discussed above, the timelines for responding to an IPR petition are short and the responses require preparation and, in most cases, the retention of experts. Second, since an activist will likely publicize the filing of an IPR petition, the company will likely receive inquiries from media and investors. Your company should have a list of employees that would be part of the internal team and have outside counsel, public relations and potentially investment bankers identified to aid in the investor response. The company needs to ensure that they understand the industry landscape and have a plan to address the IPR and what impact a negative result from the IPR would have on the company, as well as other patents or patent applications within the company's portfolio. The IPR timeline at the USPTO will be an important part of how the company reacts.
7. Don't Panic
Although the filing of an IPR resulting in a stock price drop may set off some alarm bells at the company, don't panic. First, set up a meeting with all the members identified in your plan to review the IPR and determine a course of action. Next, you will likely need to inform and/or confer with the company's board of directors. The CEO and other company spokespersons need to be able to explain to investors the IPR process and timeline and the potential risks to the company if the IPR results in a negative outcome for the company.
8. Study the IPR Filer and Any Affiliates
Knowing the background of the IPR petitioner is not only important for responding to the IPR filing, but also for responding publicly and addressing a drop in stock price. Does the filer have a history of filing IPRs? Is the filer part of an advocacy group? What is the filer's motive? What is the filer's (or its affiliate's) position in the company's stock? Additionally, given the potential introduction of legislation to address these types of IPRs, this information may be critical to immediately halting any IPRs filed by activist investors. You should consider monitoring the progress of H.R. 9 and may consider advocacy if you feel that the company may be a target for such IPRs.
9. Determine If There Are Any Public Reporting Requirements
Depending on the potential impact of the IPR, the company may have U.S. Securities and Exchange Commission (SEC) public disclosure requirements related to the IPR being a material event for the company. Therefore, you must work with your corporate counsel to determine whether a Form 8-K should be filed with the SEC. Such an 8-K would be need to filed within four business days of the company becoming aware notice of the IPR.
10. Keep the Business Moving Forward
This type of IPR can cause a major distraction for the CEO and other members of management, your job is to manage the situation to ensure that the company proceeds with business as usual. The more focused the company is on executing its business strategy, the less the investors will be concerned with the IPR filing.
