Protecting The Medicines Of Tomorrow

Government solutions often come with a price. For the America Invents Act (AIA), this price was an unintended impediment to medical innovation. Proposed legislation known as the Hatch-Waxman Integrity Act can reduce these costs, if Congress takes advantage of the opportunity.

The problem of patent trolls plaguing Silicon Valley was a well-documented, and troubling, problem. Patent trolls are entities that obtain patents, often obscure patents, for the sole purpose of filing lawsuits in court. The troll then uses the threat of costly litigation to extort profits from an entrepreneurial company.

IT products often contain hundreds of patents, so patent trolls holding “low-quality” patents were a constant threat hanging over Silicon Valley. This anti-growth obstacle was threatening the vitality of the companies driving the IT revolution, one of the most dynamic sectors of the U.S. economy.

The AIA, which was signed into law in September 2011, was designed to fix this problem. The purpose of the AIA was to reduce the costs on entrepreneurial firms when warding off low-quality or frivolous patent claims, while also ensuring that legitimate patent holders could still assert their rights.

As part of its provisions, the AIA created a review process known as inter partes review (or IPR for short). IPR cases are expedited legal processes that apply a lower legal standard than the federal court system because the IPR process does not presume that the patent is valid.

Supporters claim that these changes made it easier for IT companies, with legitimate patent rights, to invalidate the low-quality patents challenges from patent trolls. Thus, the AIA lessened the anti-growth burden patent trolls were imposing on Silicon Valley.

But, the innovative process differs across industries. While the AIA addressed the needs for IT firms, it worsened the intellectual property rights protection for medicines. Consequently, one industry’s solution has created another industry’s problem.

Just like Silicon Valley, innovations created by the pharmaceutical industry are dramatically improving our lives. Recent innovations are curing cancer, hepatitis C, and heart disease. In contrast to Silicon Valley, the new IPR process has encouraged frivolous patent challenges and imposed additional burdens on the pharmaceutical industry.

While some biologic medicines are more complicated, the typical pharmaceutical medicine contains between 3 and 5 patents and patent trolls were never a major threat. The simpler, less costly, IPR proceedings still rebalanced the costs, however, making it more difficult for legitimate pharmaceutical patent holders to defend their claims.

Arguably, the greatest obstacle is that the IPR process forces pharmaceutical companies to successfully defend their claims twice – once in federal court and once through the IPR process. Forcing pharmaceutical companies to defend their rights twice is both unfair and biases the justice system against innovation.

Since IPR claims are cheaper to file and have a greater chance of success due to the IPR’s lower legal standard, the IPR process also incents anti-innovation and anti-growth behavior. One particularly nefarious example, as reported in the Wall Street Journal, claimants will make money by simply filing an IPR patent challenge.

The profit opportunity arises because filing an IPR claim will likely lower the stock price of a pharmaceutical company, regardless of its merits. Therefore, if a party files an IPR challenge, and then shorts the stock (a financial investment that increases in value when the stock price of a company falls), the claimant will financially benefit when the stock declines. Of course, the decline in the stock’s value was created by the actions of the claimant creating a clear conflict of interest.

There is, undoubtedly, something wrong with a system that enables claimants to financially benefit from simply filing lawsuits regardless of its merits. And, it is not hard to predict the economic result – a surge in meritless patent challenges, and a decline in future drug innovations. Future medical innovations are jeopardized because the IPR process fails to strike the right balance.

The Hatch-Waxman Integrity Act is a reasonable solution that addresses this problem. As introduced by Senator Orrin Hatch, the bill would eliminate claimants’ ability to file two claims: one in federal court and one through the IPR process. Claimants must choose. Further, as Senator Hatch noted, if they choose the IPR process, they lose the “benefits of being able to rely on the brand company’s safety and efficacy studies for FDA approval.” The Act would also eliminate the ability of entities to file claims and short the stock.

The Hatch-Waxman Integrity Act is an important fix that would eliminate the growing disincentives to innovation that the AIA has created. It creates predictability in the patent challenge process and reduces costly litigation, while still enabling legitimate claims to have their “day in court”.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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