The Big Patent Short: Hedge Fund Challenges to Pharmaceutical Patents and the Need for Financial Regulation



The enactment of the America Invents Act (AIA) in 2011 ushered in a new system for post-grant patent review. In the interest of enhancing the efficiency of the patent regime by invalidating “bad” patents, certain requirements were relaxed. For example, the AIA created an examination process called inter partes review, which allows a party without legal standing to challenge the validity of a patent in front of the Patent Trial and Appeal Board. In the pharmaceutical patent context, it was expected that inter partes review would be utilized mostly by generic drug makers seeking to invalidate patents without incurring the significant costs of litigation—including the extensive research and development required in order to state a case.

Unexpectedly, outside investors have seized inter partes review as a profit-generating opportunity. Investors—most notably hedge fund manager Kyle Bass—target what they believe to be weak pharmaceutical patents. Such investors then seek an inter partes review of a patent’s validity while simultaneously short-selling the stock of the pharmaceutical company that owns the patent. If a patent is successfully invalidated, the pharmaceutical company’s stock likely declines, and as a result the investors profit from their short position. Although the investors’ activities arguably invite generic entry to the market, which lowers pharmaceutical prices, the investors are not acting for altruistic purposes when they challenge patents. This Note argues that this type of investment behavior abuses the inter partes review process. While much of the literature examining this topic advocates for a change in the inter partes review standing requirements, this Note recommends that this exploitative investment strategy is better addressed through financial regulation.



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Fordham Journal of Corporate & Financial Law