An Inter Partes Review (IPR) in Bad Faith: A California Court Weighs IPR Petitions for Malicious Prosecution
Is an inter partes review petition filed for business purposes other than challenging patent validity a legitimate use of the post-grant validity challenge mechanism of the America Invents Act? A recent California state appellate court decision says “yes” as long as the IPR petition itself is not “objectively baseless” in the sense that no reasonable litigant could realistically expect success of the merits.
During a negotiation between two pharmaceutical companies, Company A demands that Company B sign a waiver of orphan drug exclusivity for an epilepsy drug. Unless Company B signs the waiver, Company A threatens to file three inter partes review (IPR) petitions with the USPTO against one of Company B’s patents. The chief executive officer of Company A even admits that “we don't care about the patients, epilepsy, or any of this” and “we are here for our investors and need to show them a return.” Company B refuses to sign the waiver. Company A then files the three IPR petitions and succeeds in invalidating Company B’s patent based on one of the petitions. These facts are not hypothetical; they are the reported facts of Neurelis, Inc., v. Aquestive Therapeutics, Inc., that was decided by a California state appellate court on November 17, 2021.[1]
In this case, Neurelis filed a California state court lawsuit against Aquestive Therapeutics alleging defamation, malicious prosecution, and violation of California’s unfair competition law. This case illustrates the legal and ethical boundaries between exercising one’s right to invalidate bad patents and the consequences of abusing those rights. In response to the lawsuit, Aquestive filed an anti-SLAPP motion to dismiss the lawsuit. California, along with many other states, has a statute that forbids strategic lawsuits against public participation (SLAPP).[2] As such, an anti-SLAPP statute is tailored to protecting constitutional rights, such as the freedom of speech and the right to petition the government for the redress of grievances. Because anti-SLAPP motions have been abused, California also places some exceptions on the use of its anti-SLAPP statute. For example, California has a commercial speech exception that exempts some commercial entities from anti-SLAPP protection where the commercial speech satisfies certain conditions, such as the intended audience of the commercial speech.[3]
In Neurelis, the California appellate court found an anti-SLAPP motion not applicable to the defamation and unfair competition actions in regard to unprotected commercial speech. However, the appellate court reversed the district court’s denial of the anti-SLAPP motion with respect to a malicious prosecution claim based on the IPR petitions. In analyzing the IPR petitions, the California court described the legal analysis as follows.[4] First, the IPR petition “must be objectively baseless in the sense that no reasonable litigant could realistically expect success of the merits.” Second, the petitioner’s subjective motivation must “conceal an attempt to interfere directly with the business relationships of a competitor . . . through the use [of] the governmental process—as opposed to the outcome of that process—as an anticompetitive weapon.” In other words, the IPR petition must qualify as a “sham.”
Turning to the facts of the case, the court noted that there was some evidence that a governmental petition, such as an IPR petition, could be used as an “anticompetitive weapon.”[5] For example, the purpose of an administrative action could result in a government delay in approving a new drug. Even with a bad motive, the court found these IPR petitions were not “objectively baseless” in order to qualify as “malicious prosecution.” For example, one of the three IPR petitions succeeded in instituting an inter partes review at the Patent Trial and Appeal Board, which subsequently invalidated Neurelis’s U.S. Pat. No. 9,763,876. This IPR petition clearly had a strong basis under U.S. patent law and would not satisfy the malicious prosecution standard by any measure.
For the other two IPR petitions, the court found these petitions also failed to meet the difficult standard for malicious prosecution. In support of Neurelis’s position in the California litigation, the USPTO refused to institute inter partes review for these two petitions. However, the court found that the USPTO’s refusal alone is not sufficient for meeting the “objectively baseless” standard required for malicious prosecution. In the court’s eyes, the crux of the analysis focused on whether Aquestive filed the IPR petitions without probable cause. The court ruled that “[a]n action is deemed to have been pursued without probable cause if it was not legally tenable when viewed in an objective manner as of the time the action was initiated or while it was being prosecuted.”[6] In other words, an IPR petition was initiated without probable cause only if all reasonable patent attorneys would agree that the IPR petition was totally and completely without merit based on the facts known to the petitioner at the time of filing the IPR petition.
The court further found that neither (1) insufficiently supported obviousness assertions or (2) using already-considered prior art during prosecution as the basis for an IPR petition met the high standard for malicious prosecution. Likewise, the court emphasized that the discretionary nature of IPR institutions indicated that the lack of institution did not necessarily equate to an IPR petition lacking probable cause. Accordingly, the court denied Neurelis’s malicious prosecution claim against Aquestive.
This case is instructive on the limits of using inter partes reviews as a business strategy against competitors. The strong constitutional right to petition the government clearly overcame Aquestive’s apparent bad motivations here. However, a baseless invalidity challenge might have resulted in Aquestive’s liability to Neurelis. In response to a baseless IPR petition, Neurelis may have been able to recover costs, such as reasonable attorneys’ fees, under California state law for defending against Aquestive’s IPR petitions, assuming that federal preemption would not bar such recovery. Depending on the law of particular state, punitive damages could also be recoverable. To obtain punitive damages, a failed IPR petition may be required to satisfy even more than the malicious prosecution standard; something like “aggravated, outrageous, or fraudulent” conduct might also be required.[7] Ultimately, Aquestive’s best defense to the malicious prosecution lawsuit was simply practicing good patent law even with what were apparently bad intentions.
[1] 71 Cal. App. 5th 769 (Ct. App. 2021).
[2] See Cal. Civ. Proc. § 425.16.
[3] See Cal. Civ. Proc. § 425.17.
[4] Neurelis, 71 Cal. App. 5th at 796.
[5] Neurelis, 71 Cal. App. 5th at 796-797.
[6] Neurelis, 71 Cal. App. 5th at 800.
[7] See Bradshaw v. State Farm Mutual Automobile Ins. Co., 157 Ariz. 411, 422-424 (Ariz. 1988); Rawlings v. Apodaca, 151 Ariz. 149, 162 (Ariz. App. 1986).
