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Drug Trolls

When Israel-based Yeda Research & Development Co. discovered the tumor necrosis inhibitory protein, it was quick to obtain a patent. The 1987 discovery was the fruit of six years of work by researchers looking for proteins that could treat the symptoms of rheumatoid arthritis. Yeda licensed the patent to Immunex Corp., Wyeth and Amgen Inc. Those companies commercialized and marketed the protein as the blockbuster drug Enbrel, which was later approved to treat several other forms of arthritis as well as psoriasis.

But years after the companies took Enbrel to market, a limited liability investment partnership called Israel Bio-Engineering Project (IBEP) came out of the woodwork, claiming it was the rightful owner of the key patent. It sued Wyeth, Amgen and Immunex for infringement. IBEP had no involvement in the process of developing or researching the drug. It simply had funded a company that supported some of Yeda's research in exchange for ownership of any discoveries resulting from that research. However, that agreement had expired a year before Yeda's breakthrough.

The Federal Circuit ultimately rejected IBEP's claim to the patent in March 2005. But that victory was bittersweet. Although Wyeth, Amgen and the other corporate defendants were vindicated, the litigation dragged on for years, and was a long and costly detour from the companies' core R&D activities.

The case is one example of a new and dangerous breed of patent litigation: patent trolls that target the pharmaceutical industry.

"Trolls are getting more sophisticated in how they exploit the patent system," says Nick Groombridge, partner at Weil, Gotshal & Manges in New York who represented Yeda in IBEP v. Amgen. "Combine that with the potential for high revenues and the public's generally poor opinion of the pharmaceutical industry and there's certainly a lot of potential for this type of activity."

On The Rise

Until recently, patent trolls only targeted the technology and electronics industries, mostly because there were ample opportunities to turn dubious patents into infringement judgments or licensing fees.

"It's easy for a garage inventor to get very broad claims for using a computer over a network to do some kind of process and then come back and sue when a company later comes up with a way to execute that idea," says Brad Lyerla, partner at Marshall Gerstein & Borun in Chicago. "It's not the same on the pharmaceutical side where it takes a huge investment in R&D to develop a product, and the claims are more specific."

While it might seem that the cost and sophistication involved in developing patentable ideas in the pharmaceutical and biotech sectors would inhibit trolls' success, some trolls are translating the techniques that worked on the tech side to reach into the pharmaceutical industry's deep pockets.

One area in which trolls have already had some success is in obtaining and enforcing broad patents for the screening methods pharmaceutical researchers use to identify potentially useful molecules. Essentially, screening methods are business methods for pharmaceutical research. Bayer AG v. Housey Pharmaceuticals was one such case.

Housey is a small Southfield, Mich.-based company run by three doctors. Its main asset is a patent on a screening method to search for protein inhibitors and activators. Housey sued Bayer in 2003, alleging the company was infringing that patent by screening compounds outside the U.S. and importing information derived from the screening process to do further research. While Bayer ultimately escaped liability because it only imported information and not a tangible infringing product, that hasn't stopped Housey from forcing other drug makers to take out licenses on the screening process and filing enforcement suits against those companies that didn't do so.

"A lot of patents are issued on screening methods," says Stephen B. Maebius, a partner at Foley & Lardner in Washington, D.C. "The trends are similar to those in the tech sector. Broad patents are being obtained and they may fall into the hands of companies and investors that are most interested in licensing them to other people."

Incremental Improvements

Another area where experts expect troll activity to arise is patent enforcement efforts in which an inventor has obtained a patent on an incremental improvement on an existing drug, and then seeks to enforce that patent with regard to the entire drug.

That mirrors activities in the tech sector, where a troll has an idea for a small improvement on an existing technology but then manages to get an overbroad patent on the whole system, or tries to convince a court that a patent actually covers a larger invention. For example, Forgent Networks has wrung more than $100 million in licensing fees from its 1997 patent for compressing photographs by convincing would-be defendants such as Yahoo! that the patent actually covers the whole of JPEG technology--the gold standard for digital images. The possibility for similar semantic trickery in the pharmaceutical area also exists.

"We might see lawsuits not about the active ingredient, but about something else that gets added to it," Lyerla says. "The development of the active ingredient will have long been patented, but the small inventor will come up with a way to preserve or deliver the drug and then will try to take credit for the whole thing."

Still, the development of patentable pharmaceutical improvements on drugs requires a level of sophistication that most trolls can't easily reach. Therefore, while the potential for this kind of activity certainly exists, it will be more limited than the troll activity in the tech sector.

"The opportunities are fewer, but there will be a lot of money on the line," Groombridge says.

Aligning Interests

An interesting side effect of patent troll activity in the pharmaceutical sector may be a breakdown in the diametric opposition between the technology and pharmaceutical sectors with regard to patent reform.

As the amicus briefs filed in eBay v. MercExchange show, pharmaceutical companies are, for the time being, against any changes to the patent system, and want the strongest possible protections for IP--including automatic injunctions against alleged infringers. On the other hand, software and technology companies are urging a temperate approach, arguing that small patent holders use the threat of injunctions to essentially extort licensing fees from them.

But as patent trolls become more sophisticated in their exploitation of the patent system against pharmaceutical companies, the interests of the pharmaceutical sector may cross over to the side of the reformers--and if the powerful interest groups in the pharmaceutical sector and the tech sector align, that could add up to changes to the patent system.

"You may find pharmaceutical companies turning more toward wanting patent reform," Lyerla says. "They might soften their position on some of these issues when they become the targets of trolls."

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A New Breed Of Troll

The sophistication of pharmaceutical IP means that the patent trolls that will take on pharmaceutical companies will differ significantly from the traditional concept of a troll in the tech sector.

In the pharmaceutical sector, the trolls will be sophisticated and dangerous foes: large research universities looking to raise revenues, doctors with excellent ideas but without the resources to commercialize them, or patent licensing companies smart enough to buy up patents from those doctors.

This means that while there will likely be fewer trolls on the pharmaceutical side than in the tech sector, those trolls' patents will be stronger.

"Universities have technology transfer offices that try to make money off the patents they have by licensing them," says David Schwartz, a shareholder at Wallenstein Wagner & Rockey. "I don't know if you call that being a troll, but universities certainly try to bring money in using their portfolios of patents."

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