Next patent troll victims: Pharma and bio?

Conventional wisdom has always held that bio and pharma are safe from patent trolling. Unfortunately, that conventional wisdom is wrong.

Not only are we starting to see evidence of patent trolls moving into the biopharmaceutical space, our recent study of university patent holdings shows that the bio and pharmaceutical industries are at serious risk of the same type of destabilizing activity that has plagued the technology industry and main street businesses in recent years.

{mosads}Non-practicing entities—also called NPEs or more colorfully, patent trolls—have pursued a lucrative business model in recent years based on the following simple concept: Offer a settlement comfortably below the high costs and risks of a patent lawsuit, and a rational company may settle, regardless of whether the patent properly applies to the company’s product. This business model, which has troubled the technology industry, has now moved into coffee houses and retail stores. Bio and pharma are safe, however. Or at least, that’s what we have told ourselves.

With scattered signs showing that patent trolls are beginning to purchase biopharmaceutical patents, however, my co-author and I wondered whether the industry was really as safe as assumed. In particular, we wondered whether university holdings could provide a tempting pool of ammunition to launch against current biopharmaceutical products.

To test that theory, we looked at the life science patent holdings of five major research universities: University of California, University of Texas, MIT, CalTech, and the University of South Florida. Our study identified dozens of patents that could be deployed against current bio and pharma industries, following the patterns that NPEs have used against other industries. These include patents on drug formulas, methods of treatments, research methods, dosage forms, and others.

If patents like these are around and threatening, why hasn’t the biopharmaceutical industry found and dealt with them? The answer may be that up until now, university holdings have has posed little threat, particularly peripheral patents that could be used for the type of bargaining leverage popularized in modern patent trolling. Another recent study of mine—an extensive academic study of all 13,000 patent lawsuits filed over the last four years—showed that universities filed less than half of 1 percent of all of the patent lawsuits. Thus, the threat of university holdings may have been too low to justify the costs of searching out and licensing every patent that could potentially be launched against a product.

That safety net, however, may be coming down. Last fall, the Association of University Technology Managers began revisiting its policy against selling patents to NPEs. Pressure on university technology offices to bring in more revenue is causing the Association to rethink its position. That re-evaluation, however, could have serious consequences for the biopharmaceutical industry and for universities themselves.

Many university patents are developed at least in part with federal funds, and there are concerns when government-funded inventions end up as NPE lawsuits. For example, in what economists are calling the “leaky bucket,” only an estimated 20 percent of the money paid to NPEs gets back to the original inventors or into any internal R&D. And that’s a very small amount. On the flip side, the majority of NPE lawsuits are filed against small businesses. These perspectives raise concerns that government-funded research is being used to harm American businesses with little return to innovation.

As a result, dancing with NPEs could be a risky business for universities. If public anger about patent trolling focuses on universities, they have much more to lose in terms of federal dollars than they have to gain from NPEs.

Concerns about university portfolios and patent trolling are particularly relevant as Congress considers reform proposals. Some of the proposals would exempt universities and those working with universities. It is critical for legislative drafters to understand the potential for problems within university portfolios in general and as they might be aimed at the life sciences in particular.

The study is intended to sound a warning bell. Technology trolling seeped in silently under the radar, growing to extraordinary dimensions before lawmakers had time to react. In contrast, life sciences trolling is predictable and in its infancy. If reforms are implemented before the problem proliferates throughout the industry, legislators and regulators have a chance to cabin the activity before it becomes deeply entrenched and before too much harm occurs.

Feldman is a professor of Law, Harry & Lillian Hastings Chair, and director of the Institute for Innovation Law at the University of California Hastings College of Law. She recently co-authored the study, “Patent Trolling: Why Bio & Pharmaceuticals are at Risk.”