Can Patent Owners Buy Sovereign Immunity?
October 26 2017
The latest issue in the patent world is one no one would have expected – sovereign immunity.
How did this issue arise? Allergan, the company that makes the dry-eye drug Restasis, has employed an aggressive strategy in attempting to protect its $1.5 billion market by selling its Restasis patents to a Native American Tribe. In September, Allergan sold the patents to the Saint Regis Mohawk Tribe in New York. Because the Tribe is a sovereign nation, it can claim sovereign immunity from suits in federal court under the 11th Amendment. The validity of Allergan’s Restasis patents had been challenged by Mylan and several other generic drug manufacturers in the United States Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB) in inter partes review (IPR) proceedings. (An IPR is like a mini trial, in which both the patent owner and the challenger participate). Immediately after acquiring the patents, Saint Regis moved to dismiss the IPRs on the grounds that the Tribe has sovereign immunity. The PTAB has yet ruled.
Allergan brought this problem upon itself. Allergan sued Mylan and several other generic drug manufacturers in the federal district court for the Eastern District of Texas for infringement of its Restasis patents. The trial judge in that case is a judge on the Federal Circuit Court of Appeals who is sitting in the district court.
As is typical in patent infringement suits, the defendants filed IPRs in the PTAB, challenging the validity of Allergan’s patents. The PTAB instituted the IPRs and began the process. Final oral argument was set for September. About one week before the hearing, Allergan announced that it had sold its Restasis patents to Saint Regis. In that deal, Allergan sold six of its Restasis patents to Saint Regis and licensed them back. Allergan obtained an exclusive license for all FDA-approved uses, leaving Saint Regis with the rights to the patents for educational purposes. After the deal was done, Saint Regis asserted sovereign immunity in the IPRs and sought to have the IPRs dismissed.
This move by Allergan triggered a firestorm from the generic drug manufacturer defendants, other drug companies, and Congress. The defendants contended that Allergan’s deal with Saint Regis was a sham, and will harm consumers who need access to less expensive generic drugs that are of the same quality as the patented drugs. In Congress, Senator Claire McCaskill has already introduced a bill to preclude Native American Tribes from asserting sovereign immunity in PTAB proceedings. Senator McCaskill and other Senators have stated that Allergan’s tactic is anticompetitive and an attempt to improperly further the monopoly on its patents.
Meanwhile, in the district court, Allergan moved to add Saint Regis as a joint plaintiff, clearly trying to demonstrate that the deal is not a sham and that Saint Regis really is the patent owner. In connection with this motion, Saint Regis agreed that it would waive its sovereign immunity for purposes of the litigation. Not surprisingly, the defendants opposed Allergan’s motion.
Interestingly, the district court has now ruled, after holding a bench trial in early September, that four of Allergan’s patents are invalid as obvious. In his decision, the judge was very concerned about Allergan’s deal with Saint Regis, stating that the deal was essentially an attempt to “rent” the sovereign immunity of a sovereign nation. The court said that sovereign immunity should not be a commodity that private companies could purchase to avoid proper challenges to their patents.
What will happen next?
- How will the district court rule on Allergan’s motion to add Saint Regis as a joint plaintiff? The courts ruing will depend on how many rights Allergan transferred to Saint Regis. If Allergan transferred substantial rights, the court could find that Saint Regis is the patent owner, and grant the motion. However, based on the court’ statements in its decision on invalidity, it appears that the court may deny the motion. Either way, because the district court judge is a Federal Circuit judge, his decision could affect how the Federal Circuit will rule when the issue comes before it.
- How will the PTAB rule on Saint Regis’ motion to dismiss the IPRs on the grounds of sovereign immunity? Some experts believe that if the district court denies Allergan’s motion to add Saint Regis as a plaintiff in the litigation, the PTAB will conclude that Saint Regis is not really the patent owner and does not need to be a party to the IPRs, and will proceed with the IPRs despite Saint Regis’ claim of immunity. Others think that the PTAB will decide that sovereign immunity does not apply in PTAB proceedings because these proceedings are not the same as federal court litigation. Alternatively, it is possible that the PTAB will grant Saint Regis’ motion because in several prior cases, the PTAB has dismissed IPRs against state universities on sovereign immunity grounds. However, even of the PTAB decides that sovereign immunity does apply, it might rule against Saint Regis if it determines that Saint Regis licensed all substantial rights back to Allergan.
- How will the PTAB rule on the validity of Allergan’s patents in the IPRs? The PTAB will make its decision based on the legal standards that apply in IPRs, which are different from those that the district court applied in the litigation. In addition to determining the validity of the patents that the district court invalidated, the PTAB will have to decide the validity of two patents that the district court did not invalidate.
- What will Congress do about the 11th Amendment immunity in these situations? Several Senators have described Allergan’s deal as a loophole that needs to be closed. If Congress is serious about taking on drug companies and reducing prescription drug costs, this bill may be a winner.
Thus, it seems that Allergan’s strategy has a lot of problems. After Allergan announced its deal in September, other drug companies began considering the same strategy. Given the way things have turned out so far, however, these companies may now be reluctant to jump on the bandwagon.