IPRs Threatened/Filed as Money-Making Strategy

By Joseph Herndon --

On March 10, 2016, Silver Star Capital, LLC filed a petition for Inter Partes Review of U.S. Patent No. 6,212,079 (IPR2016-00736).  The patent owner is Power Integrations, Inc.  On its face, this seems like another IPR filed using the post grant review process of the AIA as intended.  However, the patent owner's preliminary response indicates otherwise, as the Principal of Silver Star Capital, LLC is Kevin Barnes.

The '079 patent relates generally to switched mode power supplies and, more specifically, to a method and apparatus for improving efficiency in a switching regulator at light loads.  The IPR petition alleges that the '079 patent is anticipated by or obvious over a number of prior art references.

In the patent owner's preliminary response, the patent owner indicated that Silver Star is not in the semiconductor business, nor in the switching regulator integrated circuit ("IC") business which is the specific semiconductor product at issue in this IPR, but that Silver Star filed its Petition simply for the purpose of extorting a settlement from Patent Owner in return for not filing its Petition, and after its filing, for withdrawing the Petition.

This extortion is being perpetrated by Kevin Barnes, Principal of Silver Star, who is certainly not new to this type of extortion.  See e.g., Ferrum Ferro Capital, LLC v. Allergan Sales, LLC, IPR2015-00858.

Attached to the patent owner's preliminary response were many exhibits, including four letters that highlight the story here.

First, an important fact in the story is that the '079 patent is the subject of two patent infringement litigation cases pending in the Northern District of California, Civil Actions Nos. 09-cv-5235-MMC and 15-cv-4854-MMC (e.g., Power Integrations, Inc. v. Fairchild Semiconductor International, Inc. et al., 3:09-cv-05235 (CAND); Power Integrations, Inc. v. Fairchild Semiconductor International, Inc. et al., 3:15-cv-04854 (CAND)).

The first letter, from Mr. Barnes at Silver Star Capital to the President and CEO of Power Integrations, indicates that Silver Star has prepared an Inter Partes Review petition demonstrating the invalidity of specific claims of the '079 Patent, and that Silver Star is aware that institution of an IPR petition can potentially be denied if the real-party in interest is otherwise time-barred under the 12-month litigation threshold.  Silver Star indicated that it is in no way affiliated or in privity with Fairchild Semiconductor Corp/, System General Corp., or any other previously accused infringers of the '079 Patent.  Nevertheless, upon Silver Star filing the '079 IPR with the USPTO, formerly time-barred entities, including Fairchild Semiconductor, will have the opportunity to join Silver Star's IPR proceedings challenging the '079 Patent once the claims are instituted and aid in the prosecution to invalidity.  The first letter ends with an invitation to Power Integrations to have a discussion to determine if Silver Star should consider alternatives to its contemplated '079 IPR Petition strategy.

The second letter, written as a response to Mr. Barnes from counsel for Power Integrations, declined the invitation and called the event a "shakedown effort".

The third letter, written by counsel for Power Integrations as a response to a telephone call from Mr. Barnes, declined a so-called proposed "settlement".  Apparently, the settlement to forego the IPR with respect to Power Integrations' '079 patent included one of:

• Pay Mr. Barnes $600,000 up front + 10% gross of any damages PI collects for infringement of the '079 patent going forward; or

• Pay Mr. Barnes $1,800,000 up front + 3% gross of any damages PI collects.

In the fourth letter, written by Mr. Barnes at Silver Start Capital to counsel for Power Integrations, Mr. Barnes put forth allegations of invalidity of the '079 patent, and noted that in a recent PTAB ruling dated September 25, 2015 (IPR2015-01169, Paper No. 21) (Coalition for Affordable Drugs VI, LLC v. Celgene Corp), in a decision denying sanctions, the judge stated:

Profit is at the heart of nearly every patent and nearly every inter partes review.  As such, 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.

Thus, Silver Star appeared on sound ground with its strategy for attempting to extract money from Power Integrations.

As we see, instead of only targeting biopharma companies as he has in the past, Mr. Barnes is now targeting hi-tech companies.

Previously, Mr. Barnes, the sole principal of Ferrum Ferro Capital LLC, tried a similar attempt to "shakedown" Allergan (see links below), and he has also brought more drug IPRs under different names (e.g., Gray Square Pharmaceuticals LLC), and once as an "IPR partner" of a St. Louis-based virtual generic company (Generico LLC (which collaborated on its IPR with an entity called "Flat Line Capital," whose principal is Kevin Barnes)).

The entity called "Silver Star Capital LLC" seems to have been formed for going after valuable high tech patents that have been successfully asserted in litigation by their owners.  The strategy is simple -- provide Mr. Barnes a large payment and share of the infringement damages award or Mr. Barnes will file an IPR.  And if you do not pay off Mr. Barnes, you may be in for a long batter because once the IPR is filed, formerly time-barred entities (such as the defendants being sued by the patent owner) will have the opportunity to join Silver Star's IPR proceedings challenging the '079 Patent to aid in the prosecution to invalidity.  What this means is that the defendant, who has undoubtedly spent more time, money, and effort, and who has a substantial interest to invalidate the patent, can join teams with Mr. Barnes in the IPR.

The IPR between Silver Star and Power Integrations is on-going now, as are the two pending litigations in California.  It will be interesting to see who wins this battle, but at this stage, it would appear that Power Integrations is not backing down.

For additional information regarding this topic, please see:

• "Ferrum Ferro Capital Files Motion to Strike Allergan's Complaint Alleging Misuse of IPR Process," August 12, 2016
• "Allergan Fights Back, Files Complaint Against Venture Fund That Filed IPR Petition," July 13, 2016

Comments

[EG]

Hey Joseph,

More proof that IPRs are seriously flawed and should never have been part of the AIA (Abominable Inane Act).

[skeptical]

Part and parcel of the AIA....

This just reflects the level of the (Citizens United) $tyle of "Voice" that permeates ALL of the AIA.

Perhaps it is a good thing that Congress explicitly rejected the separability clause...

[Paul F. Morgan]

There is no logical reason to "throw the baby out with the bath water." That is, the [very rare] cases of misuse of IPRs for settlement extortion can an should be legally delt with. It does not require using that rare activity as an illogical excuse to dump the entire IPR system. There has been vastly more such settlement extortion [and unnecessary legal costs] from D.C. suits on clearly invalid patents, which IPRs now frequently prevent. The extremely small percentage of Fed. Cir. reversals of numerous IPR decisions on patent claims in D.C.suits speaks for itself on that subject.

[cw]

Once the IPR is instituted, if the parties settle, can't a new third party simply come along, pick up all the pieces left by the patent challenger, and start again?
I've never understood how the USPTO can institute an IPR because it determines that the patent may not be valid, and then allow the proceeding to end because the parties settle.

[Mike Borella]

CW,

You have a good point, though if the proceeding continued after settlement, I think we'd see parties filing a petition, after institution settling for zero cost, and then letting the PTO sort it out. If would be a cheap way of harassing patent owners.

Perhaps requiring that petitioners already have a dispute over the challenged patent would solve some of these problems.

Mike

[skeptical]

Mike,

Except that goes against the explicit rationale of the IPR NOT having a standing requirement....

[Atari Man]

Skeptical: I think Mike's point is that we can now see that not including a requirement for standing was a mistake. Several years before the AIA, SCOTUS lowered the bar for standing in DJ actions for patent invalidity/non-infringement, so that even a "non-threatening" invitation to take a license can confer DJ standing. Why not set a similarly low bar, but a bar nevertheless, for IPRs?

[skeptical]

Atari Man,

There are many things with the AIA that can be seen to be mistakes - and many of these were noticed prior to its being signed into law (and yes, I actively contacted my government representatives with these points).

Standing in IPRs is rather low on my list of AIA mistakes.

[Moocow]

@ Paul - why the need to emphasize the "extremely low" incidence of such shakedown attempts in IPR? For one, few patent owners make such letters public, so kudos to Power Integrations for lifting the veil. There are many instances where patent owners make passing reference to petitioner payment demands in their preliminary replies. Many more patent owners don't even try to bring this up, because the Board couldn't care less. And we will never know the universe of "dark IPRs" where a payoff was made and the threatened IPR was never filed. Patent owners have every interest in keeping payoffs confidential (once you start paying, others will show up wanting to be paid also). So no, don't assume that this kind of thing is vanishingly rare - it isn't.

[Moocow]

These letters are so very illustrative of how defects in the IPR system create opportunities for abuse. Take the reference to joinder in the first letter. The PTAB is bending over backwards to allow time-barred district court parties back into IPR under the guise of joinder. If the Board didn't so happily offer litigants a second bite at the apple, maybe threats like these would be less effective. Or take the reference to lower standards of proof in IPR. The Board's willingness to re-decide district court cases on lower proof and broader claim constructions surely ramps up the threat here. Let alone the gleeful citation to careless and indifferent Panel statements on "profit motives." Maybe the PTAB should have been more careful when it signaled that shakedown artists are welcome. At the end of the day, though, people like Kevin Barnes are not really the problem; they are a symptom of what's wrong with IPR.