Allergan Assigns Patents to Native American Tribe to Avoid Validity ChallengePDF
What will those lawyers think of next? In one of the most surprising patent strategies ever, the Irish drug company Allergan has assigned six patents on its top-selling dry eye drug Restasis to the Saint Regis Mohawk Tribe of upstate New York, which is one of the colonial-era Iroquois Nations. The federally recognized tribe is now the owner of the patents, with Allergan having taken back a license to exploit them. The purpose of the transfer is to take advantage of the tribe’s claim to “sovereign immunity,” under which an Indian tribe (the usual legal term), as a sovereign nation, is immune from being sued unless it consents or Congress abrogates its immunity. Allergan’s hope is that would-be generic competitors will be prevented from challenging the validity of the patents either in federal court or through the U.S. Patent & Trademark Office’s inter partes review process.
The idea apparently had its genesis in a decision by the USPTO’s Patent Trial and Appeal Board in a case involving an information technology patent held by the University of Florida. The PTAB held that the university, as an agency of the sovereign state of Florida, was immune to an inter partes challenge to the patent’s validity. Although the PTAB is an administrative body rather than a court, sovereign immunity is usually deemed to extend to “quasi-judicial proceedings,” which accounts for its application in the Florida case.
Inter partes review allows any third party to challenge the validity of a patent on grounds of lack of novelty (section 102 of the Patent Act) or obviousness (section 103) at any time commencing nine months after the patent was issued (there is comparable procedure, post-grant review, available during the first nine months). In resolving a challenge, the PTAB uses an accelerated process involving expert panels and telephone hearings, and is required to reach a decision within a year. The PTAB has been invalidating challenged patents at a rate significantly higher than 50% over the five-plus years the procedure has been in effect. Companies that want to market a generic version of a patented drug before the patent expires have found inter partes review to be especially useful, and drug patent owners like Allergan have consequently found it to be especially threatening.
One of the law firms that represented the University of Florida, a Dallas IP boutique called Shore Chan DePumpo, now represents the Mohawk tribe, suggesting that it conceived and arranged the deal with Allergan. According to Allergan’s press release, the tribe is receiving $13.75 million up front and the opportunity to earn $15 million per year in royalties. The patents will expire in 2024. This appears to be part of an evolving business plan for the tribe, as it reportedly acquired another patent portfolio last month from SRC Labs LLC, a Cray computer offshoot.
Will it work?
The deal probably strikes most objective observers as absurd: a drug company in Ireland pays a lot of money to park a valuable patent portfolio with a Native American tribe along the St. Lawrence River, all to avoid challenges that the patents would otherwise be subject to. But from a strictly legal perspective, the strategy may well work.
There are some historical differences in state and tribal sovereign immunity. The former is rooted in federalism and the 11th Amendment to the U.S. Constitution, the latter in the common law (case-based) notion that tribes are “domestic dependent nations” that enjoy at least some of the rights of a self-governing nation. They cannot, for example, print money or engage in foreign policy, but they can refuse to be sued in almost all cases. In a nice illustration of the point, the Seminole Nation had to set up a business corporation in order to finance its 2006 purchase of the Hard Rock Café chain, because lenders and investors feared that they would be unable to sue the tribe if things went badly.
Despite these historical differences, however, state and tribal sovereign immunity are fundamentally similar. There are no obvious distinctions between the two versions of the doctrine that would dictate a different result in the tribal context.
The efficacy of the Allergan-Mohawk strategy is currently being tested in an inter partes challenge brought by generic drug maker Mylan, where the immunity claim is meeting fierce resistance. The PTAB has issued a separate decision initiating review for each patent; the first is illustrative: In a recent PTAB telephone hearing, Mylan’s lawyer contended that the deal is a “sham,” and that it amounts to a waiver of the tribe’s sovereign immunity. The tribe responded that there is no sham exception to immunity, and that the courts have never “found a waiver of tribal sovereign immunity based on equitable or policy concerns.” In other words, a court can’t ignore sovereign immunity just because it thinks it would be unfair—a correct statement of the current law, as far as I know. Nonetheless, this application of tribal immunity is entirely novel, and the Federal Circuit (the patent appeals court) or the Supreme Court could decide that the unique nature of a PTAB review proceeding requires different rules.
Allergan’s biggest problem may be of its own making: it has also filed (in 2015, before the Mohawk deal) a federal district court lawsuit against Mylan and other generic makers for infringing the same patents that are being challenged before the PTAB. An infringement defendant may escape liability by proving that the patent is invalid. However, in a district court the challenger must prove invalidity by clear and convincing evidence, versus the lower standard of preponderance of the evidence that applies in a PTAB inter partes review. It is therefore significantly easier for the challenger to win at the PTAB.
The district court infringement suit adds a further layer of complexity to the tribal immunity issue. The federal judge hearing the case in Texas has raised the question of whether the tribe (as the patent’s owner) must now be brought into the case as a co-plaintiff with Allergan—or whether, in the judge’s words, “the assignment of the patents to the Tribe should be disregarded as a sham.” If the Mohawk tribe does become a plaintiff, then it might well be found to have waived its sovereign immunity, on the theory that you can’t simultaneously sue someone for infringement and deny them the right to contest the validity of your patent. If the judge finds the assignment to be a sham, then he could simply ignore it and find Allergan to be the sole owner. Tribal immunity would then be moot. How these issues will be decided—and how the district court’s decisions will affect the PTAB challenge—remain entirely up in the air. The judge has requested the parties to brief the sham question and has ordered Allergan to turn over all relevant documents to the other side.
Is this the beginning of a trend?
Will other drug companies start parking their patents with sovereign tribes? I doubt it, but it’s too early to say definitively. While leveraging tribal immunity to avoid PTAB challenges may well be a legally valid strategy (though, as I said earlier, the courts have yet to weigh in), the potential impact on filing infringement suits may give other patent holders pause. What’s the point of having tribal immunity against inter partes challenges if you can’t sue anyone for infringement without waiving your immunity? I suspect that other drug patent owners will want to see how Allergan fares on this issue before committing themselves to the same strategy.
Another reason to go slowly is that Allergan’s stratagem has already gotten Congress’ attention. On Oct. 5, Sen. Claire McCaskill (D-Mo.) introduced a bill that would prohibit such transfers. Several other members of the House and Senate have expressed support. Congress’ attention span is notoriously short, so it remains to be seen whether McCaskill’s concern will persist once the initial glow of grandstanding has worn off. Nonetheless, the filing of the bill gives patent owners another reason to pause before jumping into complex assignment-and-license-back deals that may be difficult (or at least embarrassing) to unwind.