In US, New Legal Ploy May Protect Bad Patents

It had been a bad three months for Allergan, Inc. The drug maker’s stock price had fallen over 20 percent, as the company faced two legal challenges to the patents on its blockbuster drug, Restasis. Then, on 16 October, Allergan lost one of those challenges. A US court found the patents invalid. Allergan vowed to appeal, thus maintaining its monopoly on the drug until a final court determination, which could be over a year away. But Allergan’s monopoly could collapse far sooner, if the company were to lose the second challenge to the patents, before the USPTO. Such a loss was probable, as the agency had already found a “reasonable likelihood” that prior art invalidated the patents on Restasis. So back in September, Allergan employed an innovative legal strategy: The company gave its patents to a Native American tribe, and the tribe claimed its sovereign immunity prevented the USPTO from reviewing the patents’ validity. If this strategy were to succeed, it will do far more than just boost Allergan’s bottom line. The new strategy will increase the power of patent owners, help patent trolls, and dramatically alter the US patent system.

Flag of the St. Regis Mohawk

It’s no secret why Allergan is fighting so fiercely to keep its monopoly on Restasis. The dry-eye medicine had sales of $1.5 billion in 2016, accounting for 15 percent of Allergan’s profits, according to Reuters.

Even if the patents on Restasis ultimately fall – as now appears likely – it is worthwhile for Allergan to do whatever it can to postpone the inevitable. Because for every day its monopoly continues, Allergan earns millions of dollars.

Postponing the court’s ruling against the patents is straightforward: appeal and drag out the proceedings. But to forestall the USPTO’s administrative proceeding against the patents, Allergan adopted a far more original approach. The company gave its patents to the Saint Regis Mohawk Tribe, then the tribe moved to dismiss the USPTO’s inter partes review of the patents, on the basis of the tribe’s sovereign immunity.

It was a clever strategy. Congress has granted Native American tribes’ sovereign immunity, and experts agree that this immunity prevents the USPTO from hauling any tribe into an inter partes review proceeding in order to examine the tribe’s patents.

Sham Transaction?

However, Allergan’s strategy may not work. “The USPTO might consider this a sham transaction that should not be allowed to confer tribal immunity,” said Prof. Michael A. Carrier of Rutgers School of Law. “The reason for immunity is based on the tribe acting as a sovereign. Here, the deal seems to be done only to avoid IPR [inter partes review].”

The deal certainly doesn’t look like an ordinary commercial transaction. Allergan gave the Saint Regis tribe four valuable patents, and in return, the tribe paid Allergan a grand total of … nothing. Moreover, as part of the deal, Allergen paid to use the patents it just handed over. To obtain an exclusive license on the patents, Allergan gave the tribe $13.75 million and agreed to pay royalties of up to $15 million a year.

Allergan was transparent about the motive for this deal. “The press release [from Allergan] made it clear that the deal was done to obtain immunity from IPR,” said Kerry S. Taylor, a partner in the Knobbe Martens law firm.

The deal thus looks, to many legal experts, like a sham transaction. One of those experts is Judge William C. Bryson, a judge of the Federal Circuit Court of Appeals (sometimes called America’s “patent court”).

Sitting as a district court judge in the Eastern District of Texas, Judge Bryson on 16 October issued two rulings concerning the Restasis patents. In one ruling, the judge invalidated the four patents on Restasis, finding them to be obvious in light of prior patents. In the second ruling, the judge added the Saint Regis tribe to the lawsuit in order to ensure that his decision striking down the patents could not be challenged because of the absence of a necessary party. In that ruling, Judge Bryson expressed “serious concerns about the legitimacy of the tactic that Allergan and the Tribe have employed.” He explained:

The essence of the matter is this: Allergan purports to have sold the patents to the Tribe, but in reality it has paid the Tribe to allow Allergan to purchase—or perhaps more precisely, to rent—the Tribe’s sovereign immunity in order to defeat the pending IPR proceedings in the PTO. …But sovereign immunity should not be treated as a monetizable commodity that can be purchased by private entities as part of a scheme to evade their legal responsibilities. It is not an inexhaustible asset that can be sold to any party that might find it convenient to purchase immunity from suit. Because that is in essence what the agreement between Allergan and the Tribe does, the Court has serious reservations about whether the contract between Allergan and the Tribe should be recognized as valid, rather than being held void as being contrary to public policy.

Destroying IPR

Should Allergan’s strategy succeed and the four Restasis patents be immunized from IPR, many other patent owners will try the same ploy in order to protect their own patents. “If this is allowed to stand, there will likely be a lot more of these deals to prevent IPR scrutiny,” said Tahir Amin, co-director of the Initiative for Medicines, Access, & Knowledge, an organization of lawyers and scientists that investigates the abuse of drug patents. He added that such deals “will not be limited to the pharmaceutical industry. It will appeal to patent owners in many industries.”

The strategy could be particularly attractive to so-called patent trolls, because so many of their patents have been struck down in IPR proceedings.

[Update] Trolls have already begun using this strategy to assert their technology patents. For instance, on 18 October, the Saint Regis tribe sued Microsoft and Amazon, alleging the companies had infringed technology patents now owned by the tribe. The tribe received the patents in August from patent troll SRC Labs (the company’s sole business is to monetize its patents). Under the deal with SRC, the tribe is reportedly using its sovereign immunity to protect the patents from IPR and is getting a cut of any infringement awards. [end update]

The soverign immunity ploy threatens grave consequences for the US patent system. “It would essentially eliminate [IPR], a system that was intended to remove dubious patents,” said Amin. Many patents thus could be challenged only in court, but the costs and duration of patent litigation would make such legal challenges impossible for many individuals and smaller companies. Even large, deep pocket companies would often find it better to pay royalties on dubious patents than to spend the time and money litigating the patents in court.

The resulting thicket of bad patents would be a drag on competition and innovation in the US. Competitors would be kept off the market. Consumers would pay more for goods and services.

“We already have a huge drug pricing problem in the US. And this is counter to the solutions that people are trying to come up with,” said Carrier.

Five Senators and four congresspeople have expressed concern about Allergan’s strategy to avoid IPR. One of them, Sen. Claire McCaskill of Missouri, recently introduced legislation that would abrogate tribal sovereign immunity as a defense in IPR proceedings.

“That legislation might get some traction,” said Amin. “After Martin Shkreli [who notoriously boosted the price of a life-saving drug by 5,500 percent], Congress has been interested in doing something to protect consumers’ access to medicines.” But Amin doesn’t know what might happen to the bill, noting that “the drug companies have a lot of lobbying power.”

In the meantime, said Taylor, “It is worth watching how the USPTO and the courts treat this [legal strategy].” He added, “It will be a while before there is any clarity on this.”

Image Credits: Xasartha