3. STOCK-PRICES---Petitioning can strategically manipulate companies stock-prices

Finally, companies and organizations may use the PTAB in order to manipulate the market and reap huge financial rewards — imposing unjustified costs on patent owners, who are simply collateral damage in their profit schemes.

Using PTAB petitions to profit in the financial markets works because investors pay close attention to patent disputes. A court decision about patent validity or infringement can shift the stock price of a winning or losing firm even more than the initial grant of a patent can.88 Investors also know that the PTAB applies looser standards than the courts, which means that filing a petition at the PTAB creates a significant risk of patent invalidation. As a result, challenging a patent before the PTAB can cause significant harm to a patent-owning company’s stock price. To exploit this, a challenger can short-sell the patent owner’s stock just before filing its petition at the PTAB, knowing that the stock price will tumble and it will yield a profit on the short sale — even if the challenger knows its claims have no merit.

The most notorious example of a hedge funder manager exploiting the PTAB in this fashion is Kyle Bass, head of Hayman Capital Management LP.89 By December 31, 2016, Bass had filed over 30 petitions at the PTAB, seeking to invalidate patents held by many pharmaceutical companies. Bass teamed up with another controversial lawyer, Erich Spangenberg, and together they have filed their petitions under the name “Coalition for Affordable Drugs.” They claim that they seek to reduce pharmaceutical prices by invalidating patents and allowing generic competitors to enter the market.90 They are not, however, motivated by an altruistic desire to protect Americans from high drug prices. Bass, on behalf of his partners and investors, also often short sells the stocks of the company he is targeting at the PTAB.91 By short selling the stock, Bass makes money if the company’s stock price decreases. In several instances, the mere filing of a petition with the PTAB caused significant negative effects on a company’s share prices.92

For example, after Bass filed two PTAB petitions against Acorda Therapeutics and Shire, respectively, each of the companies’ share prices dropped.93 Acorda Therapeutics’s share price fell 9.7% and 4.8% after Bass filed two PTAB petitions in February 2015, and Shire’s share price fell 2.7% after Bass filed a petition in April 2015.94 For an institutional investor in charge of investing hundreds of millions of dollars, even small price fluctuations can produce millions, if not hundreds of millions, in profits.95 For the affected companies, however, it means significant losses: Acorda lost approximately $4 million and $2 million respectively, and Shire lost a stunning $14.9 million. These types of losses have real consequences for companies and ultimately for the public; in the pharmaceutical sector, it means lost jobs and reduced spending on the research and development necessary to create new drugs.

The PTAB has definitively ruled that petitions filed by Bass and others seeking to profit from this manipulation of a company’s stock price is legitimate. Celgene Corporation, one of the victims of Bass’s short-sale strategy at the PTAB, filed a motion with the PTAB requesting that it prohibit non-innovation-motivated petitions by Bass and others. In response, the PTAB ruled in favor of Bass, concluding that “an economic motive for challenging a patent claim does not itself raise abuse of process issues. We take no position on the merits of short-selling as an investment strategy other than it is legal, and regulated.”96

Although Bass may have since renounced his strategy,97 other companies have taken up his practice of profiting from filing PTAB petitions to manipulate a company’s stock price. For example, New Bay Capital, which tried and failed to extract a settlement from VirnetX (as described above), probably benefited from filing its petition at the PTAB. New Bay Capital is a hedge fund, not a company working in the innovation industry. After New Bay Capital filed its petition against VirnetX, its stock fell by 25%, and New Bay Capital is suspected of having shorted VirnetX’s stock.98 Moreover, New Bay Capital was not alone in filing potentially lucrative petitions against VirnetX. Another hedge fund, Mangrove Partners Master Fund Ltd., also filed PTAB petitions challenging VirnetX’s patents. The PTAB granted these petitions and instituted proceedings to review the patents despite pleas by VirnetX that Mangrove Partners Master Fund sought only to profit in the stock market from the impact of the petition.99 VirnetX claimed that “Mangrove held a short position of 270,000 shares of VirnetX stock. A month after the petitions were filed, when any movement in the stock price caused by the challenge would have subsided, Mangrove no longer held a short position. . . .”100

Unfortunately, this explicit harassment of companies working in the innovation industries — the manipulation of a company’s stock price — is tacitly endorsed by the PTAB, which maintains that motives of a petitioner are immaterial to its decisions. When patent owners send demand letters that misrepresent their motives in asserting that someone is infringing a patent, they have been rightly sanctioned by the Federal Trade Commission.101 In court cases, judges regularly sanction patent owners for improper motives and bad behavior in suing companies for patent infringement.102 Yet, the PTAB knowingly permits the abuse of its legal process by individuals or companies who merely seek to profit by depressing a patent owner’s stock prices, and the PTAB is not going to stop it.