US Congress Members Signal Move To Block Allergan Patent Deal With Tribe

Members of a US congressional subcommittee on intellectual property held a hearing last week that appeared aimed at finding ways to stop companies from “renting” the sovereignty of Native American tribes in order to avoid a process that can lead to the invalidation of patents. Elected officials called a deal between Allergan pharmaceutical company and a northeastern tribe a “sham” and a “mockery”, and signalled the start of the legislative procedure to prevent such deals.

On 7 November, the House Subcommittee on Courts, Intellectual Property, and the Internet held a hearing titled, “Sovereign Immunity and the Intellectual Property System.” The hearing looked at the issue of intellectual property rights owned by entities that claim sovereign immunity on the basis of the 11th Amendment, which refers to Native American tribal immunity.

The hearing notes stated: “Recently, drug company Allergan transferred a number of patents to the St. Regis Mohawk Tribe [located on the New York-Canada border] in exchange for an exclusive license. According to Allergan, the deal will shield those patents from inter partes review (IPR) proceedings at the Patent Trial and Appeal Board (PTAB) of the U.S. Patent & Trademark Office because the Tribe’s sovereign immunity precludes such proceedings against it.  Allergan and the Tribe have moved to dismiss pending IPRs on that basis. At the same time, Allergan is asserting those patents against competitors in district court. Although the district court recently held the patents invalid, Allergan is expected to appeal, and the IPRs are still pending. The St. Regis Mohawk Tribe has since become involved in filing lawsuits against Amazon and Microsoft with SRC Labs LLC, which transferred a number of computer technology patents to the Tribe in a deal similar to the Allergan deal. The Tribe has indicated it intends to pursue other such deals with companies seeking to assert patents as it seeks to diversify its revenue sources.”

The witnesses for the hearing were: Karl Manheim, law professor, Loyola Law School (Los Angeles); William Jay, partner and co-chair, appellate litigation, Goodwin Procter LLP; Philip Johnson, principal, Johnson-IP Strategy & Policy Consulting; and Christopher Mohr, vice president for intellectual property and general counsel, Software and Information Industry Association.

House Judiciary Committee Chairman Bob Goodlatte (R-Virginia) and Courts, Intellectual Property, and the Internet Subcommittee Chairman Darrell Issa (R-Calif.), as well as Rep. Jerrold Nadler (D-New York), the subcommittee’s ranking member, all weighed in against the Allergan deal. Other members raised questions as well.

Committee Chairman Goodlatte said he shared the other congressional members’ concerns about companies paying to “rent” the sovereignty of tribes. That sovereignty was never intended to apply to activities not related to tribes’ interests, he said. With these actions, the entire process of the AIA may be “in peril,” said Goodlatte.

Issa said the St. Regis Mohawk Tribe was invited to testify at the hearing but declined, so Issa placed in the record about a 40-page text (8 pages plus numerous inserts) as their “position and testimony,” he said. Issa also read in quotes from the tribe’s counsel from various press reports in which he indicates they would be interested in many more such cases.

“The IP system only works if it strikes the right balance,” Issa began. The system – and the committee – aims to “reward true innovators for their creative works,” he said. “But the IP system must be protected from several types of wrongful behaviour.” These include those who have tried to use the PTAB system to short funds, or as trolls to coerce money in lieu of a filing, who he said “have in fact been gaming the system.”

The America Invents Act (AIA) was intended to, “and in a small way has, succeeded in finding patents which claim claims that belong to someone else.” Invalidity is found when it turns out through prior art that someone else has already owned that invention. Issa compared this to a person claiming to have rights to land, and putting a fence on it, and later found out through surveying that somebody else owned four feet of that. You’d be asked to move your fence, and nobody would view it as anything else than, ‘You get to have land you truly always had, not the land you may have thought you had without a proper survey.’”

And Issa referred to a survey that showed that 99 percent of patents are not being reviewed in this review process. And of the less than one percent that are reviewed, nearly half survive intact, he said. “You’re dealing with essentially a fraction of one percent of all patents will be invalidated under this procedure,” he said. So it is not a large-scale activity, yet numerous companies – including Allergan, which also declined an invitation to testify at the hearing – are showing interest in putting their patents into what he said he considers “a sham deal.”

The word sham does not imply illegality, he said, it just means “it was not a good faith sale of their patent rights, but in fact a sale lease-back for no purpose other than to evade the kind of patent review that is currently in the law, and for which Allergan and other pharmaceutical companies regularly find themselves.

The patents in question are for a drug that has been on sale for two decades, whose original patents have expired, he noted, so the decision affects the possibility of producing generic versions of the drug.

Issa also insisted that the sovereign rights of governments and tribes “will be protected without a doubt by this committee” and not wrongly undermine commercial rights of tribes. But as it came out later in the hearing, the general view appeared to be that tribes are subject to federal rules, and have sovereignty for matters that affect the tribe, which the drug patents are not considered to be.

Nadler, for his part, said in his statement that as a result of the actions of Allergan and the tribe, “a new set of questions have arisen: Can sovereign immunity be used as a giant loophole for private actors to evade legal scrutiny of their intellectual property, and to exploit for their own commercial purposes? And, if so, what can Congress do about it?”

Nadler laid out the circumstances and cast a negative light on the actions, calling it a “cynical ploy” by Allergan “to shield its patents on a lucrative drug from review at the US Patent and Trademark Office, by taking advantage of a Native American tribe’s sovereign status.

“Rather than subject itself to the PTO’s Inter Partes Review, or IPR, process, Allergan transferred the patents on its highly successful drug, Restasis, to the St. Regis Mohawk Native American Tribe, which immediately granted an exclusive license back to Allergan,” Nadler said. “Allergan paid the Tribe $13.75 million upfront, as part of the deal, plus it committed to ongoing royalties of $15 million a year.  In exchange, the Tribe needed only to agree that it would invoke its sovereign immunity if the patents were challenged in IPR.”

“According to Allergan, it took this step because it believes IPR is deeply flawed, unfair to patent-holders, and disruptive to the balanced process established for generic drug competition under the Hatch-Waxman Act,” he said. “Moreover, they argue, their patents could still be reviewed in federal court, just not in IPR.”

“It is true that Allergan’s gambit did not shield the patents from federal court review, and in fact, those patents were recently held invalid by a court in the Eastern District of Texas,” he continued. “However, the Court in that case also made clear that it had ‘serious concerns about the legitimacy of the tactic that Allergan and the Tribe have employed.’ This deal has been widely condemned, not just because it is seen as thumbing its nose at the legal system, but also because, if successful, other drug companies could use this scheme to protect expensive brand-name drugs from lower-priced generic competition.”

IPR was created in the 2011 America Invents Act, Nadler noted, adding, “It is intended to be a relatively quick and inexpensive way for the PTO to conduct a second look at an issued patent, and to invalidate patents that should never have been issued. This administrative process occurs separately from, though often concurrently with, federal court consideration of the same patent’s validity.”

Issa also said that the generics company Mylan sent a letter stating that as a result of Allergan’s action, some 22 billion generic doses of the medicine were not made available, which it valued at $1.5 billion that was “distorted”.

Nadler also laid out frequent arguments against and for the IPR process. Critics say it is not working as intended, gives competitors too many challenges to a patent’s validity. They also argue, and he said he agrees, that IPR proceedings should not use a different standard for evaluating patent validity than the one used in federal courts. And critics say the process is overly weighted against the patent-holder and is too likely to find a patent invalid.

He also said the IPR process has many defenders, who argue that “the patent system is strengthened by having an efficient system for weeding out invalid patents.” It targets patent trolls who feed off of weak patents that never should have been granted, which the IPR removes from market. They also say the USPTO only institutes an IPR proceeding when there is a reasonable likelihood of invalidity, so it is to be expected that a significant portion would result in cancellation of the patent, which is not the same as the IPR system being unfair to patent-holders.

In the end, Nadler said the merits of the IPR process should be debated and changes made if needed, but by Congress, with input from stakeholders. “It is unacceptable, however, for private actors, like Allergan, to do an end-run around IPR by making use of a third-party’s sovereign immunity, solely for strategic advantage,” he said. “Such behavior makes a mockery of Congressional authority and of the rule of law.”

And he particularly raised concern over the precedent the deal sets. “Already, other companies are rushing to make similar deals, across various industries,” he said. “Whatever one thinks of IPR, it is the law of the land, and it is the clear intent of Congress that it be available to anyone who seeks to challenge a patent under its rules. We should not allow gamesmanship to circumvent Congressional authority.”

In testimony, the witnesses generally raised concern about the actions of the tribe and Allergan.

Manheim said it has the potential to upset the balance of the IP system. He listed several legislative solutions in his written testimony, including a bill introduced by Senator Claire McCaskill (D-Missouri) to “abrogate the sovereign immunity of Indian tribes as a defense in inter partes review of patents.” Another is conditioning a patent grant or assignment on the waiver of sovereign immunity. He said a limited exception to sovereign immunity could be crafted without violating the 11^th Amendment or respect to Native Americans.

Manheim said that setting aside tribal sovereignty via federal statute for patent immunity raises no constitutional issues in his opinion. He also said the Hatch-Waxman Act is a “prime example” of the balance that allows removal of patent monopolies if they are not contributing to science and the useful arts. That’s because it encourages generic companies to enter the market and compete with lower prices. But they first have to successfully challenge the patent, which is more difficult if the patent assignee has sovereign immunity. Congress has the ability to require that assignment of patent rights to a sovereign entity must result in a waiver of their immunity, he said.

Jay, who said he was asked to testify on behalf of the Association for Accessible Medicines, which helps companies bring to market generic and biosimilar medicines, said such deals as Allergan and the tribe will “leave more bad patents for longer.” He said Allergan had a patent on the product that was coming to an end in 2014, so the company got a “second generation” of patents on the same product. The new patents do not expire until 2024. Allergen had reason to believe the new patents would be challenged under the IPR process, he said, so it sought to put its patents beyond the reach of the patent office, effectively seeking “asylum” for its patents in Indian country. The deal was done on the eve of the USPTO hearing. After receiving millions of dollars payment, the tribe stepped forward and demanded the USPTO stop the process.

Jay noted that patents are not to be granted to obvious inventions that are already known, and the IPR process is a way to allow more information to be provided to patent examiners to make a better decision after the fact. On another note, Jay said it is not surprising to have multiple analyses to a patent as there can be multiple legal challenges to a patent. The Allergan deal, he said, would set up a different set of rules to allow patent owners with “enough money and enough gall” to enter into a transaction like this one. He encouraged Congress to “use its power” to stop such deals.

When asked later by a subcommittee member, Jay spoke in favour of congressional intervention because otherwise it could start “chilling” the PTAB from starting cases.

Jay also noted that not every patent on a pharmaceutical product represents a “true innovation,” and the system is being used to “sift through” to identify true innovations and those that are “evergreening” old patents with minor changes to the product. A point made several times during the hearing is that inherent in patenting is that it limits competition, which leads to higher prices. Jay said the price of the drug in question in the tribal deal has doubled over the past decade.

Johnson raised several issues of concern about the IPR process, calling the parties’ actions a sign of a flawed IPR process, fueling a “myriad” of abuses. Many patent owners now see IPR as “grossly unfair,” he said.

Johnson suggested requiring the same rules for both processes, IPR and the courts, in order to remove the “arbitrage” practiced by the sovereign entities. He also said PTAB involves significant duplication. To the metaphor about building a fence on property, he said the problem is when the IPR process finds the fence was not placed properly, the PTAB does not just move it into the right place, it removes it altogether.

Mohr said states’ immunity is “out of place when the state participates in a national marketplace in the same way as any other participant. For example, … states are active participants in the intellectual property marketplace, engaging in sports broadcasting, merchandising, and a variety of research and licensing activities. In SIIA’s view, when they commercially exploit those federally-created rights, the law should require them to play by the same sets of rules as any other commercial participant.”

On a side note, in the hearing, freshman Rep. Matt Gaetz (R-Florida) said he wanted to make sure any congressional action does not affect “innovation” that stems from tribes having different treatment, especially in the case of cannabis. Issa remarked with a smile that he is not in that field, to which Gaetz replied with seriousness, “not yet.”

Issa closed the hearing by telling participants Congress would be writing legislation to reform the IPR process with the assumption that it will apply to both states and Native American tribes equally.

 

Image Credits: US Congress