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By Alyssa Grooms
Dunlap Codding, Oklahoma City, Oklahoma

After their initial shock, lawmakers are fighting back against pharmaceutical company Allergan’s novel plan to protect the validity of its patents by bypassing the Patent Trial and Appeal Board’s (“PTAB”) scrutiny. In September, Allergan transferred the rights to six key patents on the dry-eye drug Restasis to the Saint Regis Mohawk Native American Indian tribe in an effort to use tribal sovereign immunity to shield the Restasis patents from inter partesreview (“IPR”) proceedings at the PTAB.

Under the terms of the deal, Allergan transferred ownership of the key Restasis patents to the Saint Regis Tribe, which licensed them back to Allergan. The Tribe then sought to dismiss pending IPR challenges. In return, the Tribe received an upfront payment of $13.75 million and $15 million in additional potential annual royalties.

The defense of sovereign immunity as a shield against IPRs is not new. In May, the PTAB dismissed an IPR based on a state university’s assertion of 11th Amendment sovereign immunity.1 The decision reiterated2 that state agencies (e.g., state universities, medical schools, and research centers) enjoy sovereign immunity, which bars IPR challenges to patents they own. Although tribes are subject to sovereign immunity through congressional action, not the 11th Amendment, tribal sovereign immunity generally follows state sovereign immunity. However, Allergan’s efforts represent the first time that an entity that possesses immunity proactively approached patent owners and proposed to take ownership of their patents. If the Allergan-Saint Regis deal works, it could allow Allergan to extend its monopoly on Restasis, thereby maintaining its billion-dollar-plus annual revenue from the drug.

A key question in determining the legitimacy of Allergan’s deal is whether the agreement is a “sham.” For the transaction to legally be a sham, it would have to be unlawful or illusory in order to serve as a tax shelter or another deceptive device. The answer to this question lies in the transfer of the bundle of patent rights—and, more specifically, whether the Saint Regis Tribe has enough rights to actually be considered the owner of the patents in question. If Saint Regis is not completely free to use the patents in any way that it wishes, the issue becomes whether the restrictions on Saint Regis are enough to argue that Allergan continues to exercise de facto control over the patents and, therefore, that sovereign immunity should not apply.

Additionally, because tribes are subject to sovereign immunity through congressional action, Congress can equally act to remove tribal immunity. In a letter to the Senate Judiciary Committee, four senators called for Senators Chuck Grassley and Dianne Feinstein of the judiciary committee to investigate Allergan's “anti-competitive attempt to shield its patents from review and keep drug prices high." Senator Claire McCaskill also weighed in, calling the arrangement a "brazen loophole" that should be illegal and submitting a bill in the Senate to prohibit transfers to Native American tribes that are structured to take advantage of tribal sovereign immunity.

News of the Allergan-Saint Regis deal has sparked interest in Native American tribes pursuing similar arrangements. If they follow Saint Regis’s footsteps, Native American tribes could become significant players in the IP value creation market. However, there are still major outstanding questions. If Allergan retains de facto control over the patents, does sovereign immunity still apply to those patents? Are tribes allowed to rent out their sovereign immunity? Will Congress act to limit the application of sovereign immunity in IPR challenges? Until these questions are answered, other tribes and companies may be deterred from making similar patent transfers.

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1 NeoChord, Inc. v. Univ. of Md., Baltimore, Case No. IPR2016-00208, Paper 28 (PTAB, May 23, 2017).

2 See also Covidien LP v. University of Florida Research Foundation Inc., IPR 2016-01274; -01275, and -01276 (PTAB January 25, 2017).