Unfair Obstacles the AIA Has Put in Front of Inventors Big and Small

Allergan transferred its patents to a third-party with sovereign immunity, the St. Regis Mohawk Tribe

 

  by: Ben Brownlow | October 12, 2017

In December of 2016, the Patent Trial and Appeals Board (PTAB) instituted inter partes review (IPR) proceedings on six of Allergan Inc.’s (“Allergan”) patents covering its drug, Restasis, an eye drop that increases tear production.

Allergan previously brought patent infringement actions against several of its competitors in the Eastern District of Texas in August of 2015,[i] accusing three of its competitors of infringing six of its patents protecting its innovative Restasis drug therapy. Rather than fight it out with Allergan in district court, where defendants had already filed a slew of motions seeking to invalidate Allergan’s patents, the defendants decided to tip the scales in their favor by submitting the patents in suit to the Patent Trial and Appeals Board (PTAB) for IPR proceedings.

Defendants with deep pockets use this strategy in parallel with the district court litigation in the hopes they will either: (a) exploit the plaintiff’s fear of losings its patent to apply pressure at the negotiation table; or (b) if no settlement is reached prior to a PTAB decision, invalidate the patent owner’s rights in whole or in part. Even if some of the claims survive the IPR, patent owners are often left with significantly weaker (if any) infringement positions in the litigation, and infringing competitors have one less group of patents to stop them from capitalizing on the research and investment in product development carried out by a competitor.

To avoid the chore of simultaneously defending itself in two parallel legal proceedings, Allergan transferred its patents to a third-party with sovereign immunity, the St. Regis Mohawk Tribe (“Tribe”) in upstate New York. Like states and state-owned institutions, the Tribe enjoys sovereign immunity against legal actions brought by private parties or state governments [ii] The Tribe’s sovereign immunity extends to its business ventures as well, even ventures with third-parties and dealings outside of its sovereign territory. Without waiving its sovereign immunity by consent, the Tribe argues it is immune from the IPR proceeding. Congress has the authority to pass a bill to place express limitations on tribal sovereign immunity, and it appears they may be preparing to do just that.

Sen. Claire McCaskill (D-MO), who last week introduced a bill “[t]o abrogate the sovereign immunity of Indian tribes as a defense in inter partes review of patents,”[iii] has been a long-time champion of the patent troll narrative. It’s curious that Sen. McCaskill decided to focus solely on tribal sovereign immunity and not expand the bill to include state-owned institutions, such as the University of Florida Research Foundation, which successfully asserted its sovereign immunity to exempt itself from an IPR proceeding earlier this year.[iv]

Should the PTAB recognize the Tribe’s sovereign immunity and dismiss the IPR, it is likely that other companies will employ similar strategies to avoid IPR purgatory, such as assigning patents to state-owned universities or other sovereign entities.

“In her ongoing effort to protect consumers and expand job and business opportunities,”[v] Senator McCaskill led a Senate hearing in 2013 during which she decried “patent trolls” as harming consumers and stifling economic growth.[vi] In the hearing, she cited phony statistics about inflated patent filing statistics, suggesting a causal relationship between patent assertion entities (PAEs) and ballooning patent infringement suits. Senator McCaskill’s past rhetoric indicates she is either misinformed or disingenuous.

I’m sure she was aware to adjust those figures to compensate for the AIA anti-joinder rules, which nullified Rule 20 of the Federal Rules of Civil Procedure that had previously allowed plaintiffs to file a single, consolidated case simultaneously against numerous independent defendants. Amending the joinder provision of Rule 20 had the obvious effect of artificially inflating the patent litigation filing statistics to support the efficient infringer lobby’s narrative that so-called “patent trolls” are the primary cause of increased infringement suit filings in district court.

[vii]

In the figure above, the USPTO statistics on patent litigation case numbers show an obvious increase in filings coinciding with the passage of the AIA. In the preceding period, you can see a relatively stable number of filings despite not having to contend with heightened pleading standards, the Supreme Court’s Alice decision, and the increased risk of facing an IPR challenge that all should have, in theory, reduced the number of unmeritorious patent infringement lawsuits.

On her Congressional website, Sen. McCaskill categorizes a “patent troll” as anyone who seeks to license its patent to others but does not produce a good or service associated with the product. Why should there be artificial limits on the freedom of contract to dispense with one’s property as one sees fit? Maybe an operating company would rather assign the patent to a patent licensing entity with the expertise and willingness to generate a return on their investment for them. This empowers operating companies to: deliver a faster return on investment in product development with cash in hand from the sale; avoid paying maintenance fees if they have a large patent portfolio; and focus on its core competencies and continue to innovate.

I’m in no position to attack the exorbitant costs pharmaceutical companies charge for its products – they are free to charge any price the market will accept. They should be able to confidently funnel a significant portion of their budget into research and development of new drug therapies without the threat that competitors will simply copy their drug formula and undercut their prices by selling a generic replica for much lower.

Generic drug companies might simply find it less expensive to infringe a competitor’s patent than to budget for additional internal research and development investment. Allergan spent approximately $2.5 billion on research and development in 2016,[viii] about 17.6% of its total worldwide revenue for that year. Mylan, by comparison, invested around 7.4% of its operating expenses in research and development.[ix]

Few would disfavor lower drug prices and the savings that would likely passed on to consumers in the short-term. In the long-term, however, enabling companies like Mylan et al. to pirate the intellectual property of a competitor only disincentives Allergan’s investment in future drug therapies. Nothing is stopping these infringing drug companies from either: (a) taking a license to Allergan’s intellectual property at a fair, negotiated price, or (b) developing an alternative therapy that does not infringe Allergan’s intellectual property.

Regardless of whether you agree it is fair to classify Allergan’s maneuver as a sham transaction, as Sen. McCaskill has contended, Allergan has helped bring additional attention to the unfair obstacles the AIA has put in front of inventors big and small. Allergan’s CEO recently defended the move as “just trying to protect our property against a system that exposes us to double jeopardy.”[x] Unless Congress expressly limits the sovereign immunity of tribes and state universities, patent owners may have a new tactic available to shield themselves against IPR “double jeopardy”.

References:

[i] Allergan, Inc. v. Teva Pharmaceuticals, Inc. et al., 2:15-cv-1455 (EDTX), available at https://insight.rpxcorp.com/litigation_documents/11492653.

[ii] 572 U.S. Michigan v. Bay Mills Indian Community (2014), available at https://www.supremecourt.gov/opinions/13pdf/12-515_jq2i.pdf.

[iii] https://patentlyo.com/media/2017/10/TribalImmunity.pdf.

[iv] See IPR2016-01274; IPR2016-01275; and IPR2016-01276

[v] https://www.mccaskill.senate.gov/media-center/photos/mccaskill-patent-trolls-are-bottom-feeders-and-scam-artists-endangering-jobs

[vi] https://www.youtube.com/watch?v=hz5oL9yNf5M

[vii] The Drastic Rise is Patent Litigation (2000-2015), IP Policy Paper, available at https://www.uspto.gov/learning-and-resources/ip-policy/economic-research/drastic-rise-patent-litigation-2000-2015.

[viii] https://allergan-web-cdn-prod.azureedge.net/actavis/actavis/media/allerganinvestors/financial-information/proxy-materials/10-k.pdf.

[ix] http://investor.mylan.com/secfiling.cfm?filingID=1623613-17-7&CIK=1623613.

[x] http://fortune.com/2017/09/09/allergan-drug-patents-native-american/

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