Congress once again needs to correct a problem it created in the first place. But its recent attempt at a fix of the patent system is not only inadequate, but irrelevant.
Patents have long been granted to inventors by the U.S. Patent and Trademark Office if their product or process is judged to be useful, novel and nonobvious. In 2011, Congress passed the America Invents Act, or AIA, which was meant to improve patent protections, but several of its provisions belie that intent. The worst of them made possible the pursuit of challenges to the validity of a patent not only in the federal courts, as was previously the case, but also via a new procedure — “inter partes” review, or IPR, by the Patent Trial and Appeal Board, or PTAB, which resides within the patent office. That new venue, combined with the lowered burden of proof, has made a circus — with lawyers as the ringmasters — of the protection of intellectual property.
Unlike in the federal courts, in IPRs there is no presumption of validity of the patent, and the bar is different in another important way: In federal courts, a patent challenger must prove the invalidity of patent claims by “clear and convincing” evidence, the highest burden of proof in civil cases; in IPR proceedings, however, a challenger needs to show only a “preponderance” of the evidence, a lower standard equivalent to “more likely than not.”
The AIA legislation was intended to offer a more streamlined alternative to the challenge of patents in the federal courts and to stymie patent trolls, who bought up patents they never intended to use. Hedge funds, individuals, and companies sometimes purchase patents not with the intent to protect their manufacture of innovative products, but to sue innovators who had their own, similar patents. Stopping this practice was a laudable goal that made sense for technologies like software code and cell phone hardware, but it was never intended to be applied to pharmaceutical innovation, where the so-called Hatch-Waxman law, which had already effectively balanced the interests of brand-name and generic drug manufacturers by creating a pathway for generic drugs. Especially with regard to pharmaceuticals, the 2011 AIA was a solution in search of a problem.
The IPR alternative to the courts has been widely condemned by patent-holders in a number of industries, chiefly the innovative pharmaceutical industry, which considers it to be unfair, unnecessary, and anti-innovation. Other nonstakeholder observers agree, including a federal court decision that called the panels’ actions “arbitrary and capricious.” (The Supreme Court will take that case up this year.)
Here’s where it gets weird. A company called Allergan last September transferred its patents for Restasis, a popular medicine to treat dry eyes, to New York’s Saint Regis Mohawk Tribe, in an effort to use the tribe’s sovereign immunity as a shield against patent litigation, including IPR. The tribe was compensated upfront and with the prospect of future royalties, and promptly leased the patents back to Allergan. This subterfuge was disallowed by the Patent Trial and Appeal Board in February.
Nevertheless, the controversy called attention to the more fundamental problems caused by the creation of IPRs, which instead of addressing the problem of “patent trolls” had created a new set of patent trolls. Thus, at least with regard to drug patents, the PTAB/IPR approach is undermining one of the goals of the law that created it.
Unfortunately, rather than fix the underlying problems with IPRs, grandstanding senators have responded to this case by introducing a bill to prevent tactics like the one used by Allergan, the Preserving Access to Cost Effective Drugs (PACED) Act. But the bill’s author, Sen. Tom Cotton, R-Ark., and his cosponsors are treating the symptom without fixing the condition that causes it — namely, the IPR system.
The name of the legislation exposes its central fault: a naïve preference for “cost-effective” drugs at the expense of innovation. Returning to the Hatch-Waxman balance is crucially important, because the currently skewed system under IPR puts a thumb on the scale in favor of dubious patent challenges.
Remember, to bring a new drug to market costs more than $2.5 billion. And with patent protection under assault, investors are less inclined to take the risks inherent in funding the development of new drugs. Patients, the ultimate beneficiaries of pharmaceutical innovations, are the real losers.
For three decades, the federal court mechanism instituted by the Hatch-Waxman legislation has done a credible job of advancing pharmaceutical innovation by protecting patent rights while also fostering the introduction of generics. Those courts are still available to anyone with a legitimate case to challenge a patent. In fact, earlier this year, a federal district court invalidated a number of Restasis patents, finding that the ideas they were based on were obvious, in light of earlier Allergan patents.
Nobody should be fooled by the PACED Act. Preserving access to cost-effective drugs requires true regulatory reform of the Food and Drug Administration. And preserving innovation requires an end to the IPR assault on pharmaceutical patents.
Jeff Stier is a senior fellow at the Consumer Choice Center. Henry I. Miller, a physician and molecular biologist, is the Robert Wesson Fellow in Scientific Philosophy and Public Policy at Stanford University’s Hoover Institution.
