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Some Biotechs Provide Troll Bait, While Others Are Troll Prey

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By Mari Serebrov
Washington Editor

Like the troll of yore demanding his pound of goat flesh as the toll for using his bridge, patent trolls are threatening to swallow up biotech start-ups – just as they have other businesses that strayed too close to the vague boundary lines of their intellectual property.

So far, patent trolls, also known as patent licensing companies, haven't gotten too gruff with drug- and devicemakers, but it looks like that could change, Jeff Grainger, managing partner of the Foundry LLC, a medical device incubator in Menlo Park, Calif., testified at a hearing Wednesday before the House Committee on Small Business. He cited reports that the trolls are amassing data to go after the biotech industry.

Much of the data come from biotech itself, as some universities, start-ups and other companies have joined the ranks of the trolls, hoping to transform their dormant patents into gold.

Some trolls have formed around patents for inventive ideas that failed in the marketplace, Dennis Crouch, an associate professor at the University of Missouri School of Law, told the committee. Other trolls buy up hundreds or thousands of patents that aren't being practiced and then seek to license the portfolio. To force licensing, they threaten "infringers" with litigation and, in some cases, go after the end user of an "infringing" product.

As a result, the rise of the trolls has created a new business in which patents, in and of themselves, could prove to be more valuable than the inventions they protect. This new industry has revitalized the marketplace for patents, whether they're university patents languishing in the valley of death or biotech patents that failed to come to fruition. For investors, it's a way of seeing some return when a drug or device fails in development.

"In this new regime, an innovative company can turn its innovations into a royalty stream even without delivering an actual product to consumers," Crouch said.

That's not how it should be, said Mark Grady, founder and president of INdigital Telecom. Intellectual property "rules should first serve inventors – not investors – to bring innovation to the marketplace, not fruitless litigation which destroys jobs and companies, and wastes a small company's limited resources," he told the committee. "But that is exactly what is happening."

Over the past few years, the majority of new patent infringement lawsuits filed in the U.S. "have been filed by patent licensing companies seeking profits rather than competitor-vs.-competitor lawsuits," Crouch said.

In nearly every case, there's been a settlement, and those settlements are what make the trolling business profitable, Grainger said.

The trolls have already exacted a heavy price from other industries – so heavy that Congress is feeling the pressure to do something about them. In opening the hearing Wednesday, Committee Chairman Sam Graves (R-Mo.) noted that trolls and others who bring frivolous patent claims are hindering innovation and growth.

The direct cost of such litigation in 2011 was $29 billion, 55 percent of which hit companies with less than $10 million in revenue. Too often, small companies shut their doors rather than fight when they receive a letter alleging infringement. Yet fewer than 8 percent of the troll cases would likely succeed in court.

Since the reward for trolling is the possibility of a lucrative settlement, one solution often bandied about is to lessen patent damages. But watering down damages could hurt small drug and device companies because it would weaken the value of patents, making it harder for them to attract the investment they need to bring their patents to life, John Thomas, a law professor at Georgetown University, told the committee.

Grainger agreed. Any weakening of the patent system would decrease the ability to raise the funding necessary to develop new medical products, he said.

Two bills have been introduced in Congress to ward off trolls. The Patent Quality Improvement Act would expand post-grant proceedings to nearly every type of business method patent. And the SHIELD Act would award attorney's fees to the party that prevails in an infringement suit. To ensure the fees are paid, the bill requires certain companies bringing suit to post a bond.

While the SHIELD Act, if passed, could deter trolls from asserting weak claims, it also could discourage small businesses from protecting valid patents because of the cost and unpredictable litigation environment, Thomas said.

The witnesses at Wednesday's hearing offered their own solution – requiring more clarity and transparency in the claims themselves. With real property rights, it's easy to tell where the boundary is, Crouch said. But that's not the case with intellectual property. Too often, it's impossible to tell by reading the patent what invention is actually being claimed. Many of the patents asserted by trolls are ambiguous or overly broad.

The problem has increased since patents have become big business. As more patents are granted, the quality of the claims has suffered, Crouch said, noting that the Patent and Trademark Office has the authority to demand more clarity.

The need for clarity extends beyond the patent. "Every infringement complaint should contain a detailed explanation of the claim – something more than just the assertion of a 'hypothetical' infringement we receive today," Grady said. "It is unfair to burden small businesses with patent allegations no more substantive than a TV commercial."

House Sets Reg A Deadline

Amending an oversight in the Jumpstart Our Business Startups (JOBS) Act, the House voted 416-6 Wednesday to set a deadline for the SEC to implement Regulation A changes.

Under the old rules, Regulation A allows companies to conduct direct public offerings of up to $5 million; the JOBS Act raised the cap to $50 million. "But this change is meaningless until it is implemented by the SEC," said Jim Greenwood, president and CEO of the Biotechnology Industry Organization (BIO).

The JOBS Act, passed last year, set deadlines for other reforms, but it left the timing of the Reg A change up to the SEC. H.R. 701 gives the commission until Oct. 31 to complete the rulemaking to raise the cap. (See BioWorld Today, March 28, 2012.)

The SEC has missed the other deadlines spelled out in the JOBS Act, and the ongoing delay "has blunted the potential capital formation impact of the law at a time when research-intensive small businesses are in dire need of funding for their innovative R&D," according to BIO. (See BioWorld Today, April 18, 2013.)

H.R. 701 now moves to the Senate.

Track & Trace Bill Advances

A drug track-and-trace bill picked up momentum Wednesday when the Energy and Commerce Committee voted to send it to the House floor.

Safeguarding America's Pharmaceuticals Act, H.R. 1919, would establish lot-level tracing requirements for manufacturers, wholesale distributors, pharmacies and repackagers based on changes in ownership, and it would require manufacturers to serialize prescription drugs at the unit level. (See BioWorld Today, April 26, 2013.)

The bill also would preempt state requirements and set up a collaborative, transparent process between the FDA and industry to better understand how and when to move to unit-level traceability.

The lack of a deadline for unit-level traceability drew opposition from several members of the panel. Rep. Frank Pallone (D-N.J.) proposed an amendment setting a 10-year transition, which would be in line with a similar bill working its way through the Senate. The amendment was defeated.