On October 16, four patents for Allergan’s second best-selling product, the dry-eye treatment Restasis, were invalidated by a federal judge in a Hatch-Waxman Act case for patent infringement.1 United States Circuit Judge William C. Bryson of the Eastern District of Texas ruled that although Allergan had proved the defendants’ infringement of the Restasis patents at issue, the defendants, in turn, proved by “clear and convincing evidence” that the patents were invalid.2 This ruling provides a major setback for Allergan,3 which garnered national attention back in September for its unusual patent deal with a Native American tribe.4

In early September, Allergan had announced that the transfer of its Restasis patents to the Saint Regis Mohawk Tribe (Tribe), a recognized sovereign tribal government in upstate New York.5 The agreement entitled the Tribe to a one-time payment of $13.75 million from Allergan in exchange for the Tribe’s motion to dismiss the ongoing inter partes review (IPR) proceedings pending before the Patent Trial and Appeal Board (PTAB) on the grounds of sovereign immunity.6 Furthermore, it stipulated that the Tribe will license the patents back to Allergan for $15 million in annual royalties, as long as the patents remained valid.7 This legal maneuver was a strategy employed to avoid the “double jeopardy” of having the same issues—the validity of the patents—heard in two venues: before the federal court in infringement actions and before the U.S. Patent & Trademark Office (USPTO) in IPR proceedings.8

While Allergan has maintained that it does not object to the testing of its patents in federal court,9–notably, neither Allergan nor the Tribe asserted sovereign immunity in the district court case–it objects to the additional validity challenge of its patents in IPR proceedings, where the legal standard is less stringent.10 The IPR process, created in 2011 as part of the American Invents Act (AIA), provides a separate adversarial process for patent challenges, where the decisions are rendered by an administrative panel—the PTAB, a part of the USPTO—instead of the courts.11 While some commentators argue that the IPR process streamlines patent challenges, the brand-name drug industry has lambasted against this review, calling it “unfair” and “unnecessary.”12 Further, whether IPR violates the Constitution by extinguishing property rights through a non-Article III forum without a jury is under consideration by the Supreme Court in Oil States v. Greene’s Energy Group.13

This legal maneuver has been highly criticized. Members of Congress and consumer groups have expressed outrage, claiming that this tactic protects Allergan’s market monopoly and profit at the expense of patients.14 A few Senators have alleged that Allergan’s strategy to circumvent the IPR process would block generic competition, keeping drug prices high and preventing patient access to affordable medications.15 Likewise, a Puerto Rico-based drug wholesaler filed a class action against Allergan on November 7 for Allergan’s “multi-faceted overarching anti-competitive scheme to delay, restrain, or otherwise foreclose any would-be generic competition to Restasis.”16 Other commentators have also questioned whether the tribal agreement is a legitimate contractual consideration,17 with some referring to it as a “sham transaction.”18

Further, while Judge Bryson did not address the legality of the transfer of the patents in his decision invaliding the patents, he did provide lengthy dicta on the issues in the Memorandum and Opinion Order enjoining the tribe: he expressed concerns about legitimacy of the tribal agreement and whether private entities can “rent” sovereign immunity in order to evade pending IPR proceedings;19 in particular, he stated that “sovereign immunity should not be treated as a monetizable commodity that can be purchased by private entities as a part of a scheme to avoid their legal responsibilities.”20

Still, Allergan and the Tribe have both staunchly defended the deal.21 For example, the chief legal officer at Allergan, Robert D. Bailey, asserts that sovereign immunity has been used before as an affirmative defense to dismiss IPR proceeding.22 For example, in Convidien LP v. U. of Fla. Res. Found. Inc., the University of Florida, an arm of the state of Florida, successfully argued that sovereign immunity should insulate them from IPRs.23 A similar argument is also raised by the Tribe.24 Nevertheless, other commentators stress that there is an important difference between the Tribe and the cases involving research universities.25 With the latter, those asserting the sovereign immunity are the original owners of the patent under review.26 Allergan also maintains that consideration has been given by both parties; the consideration given by the Tribe is its promise “not to wave sovereign immunity with respect to any IPR or other administrative action in the PTO related to patents.”27

In the meantime, members of Congress have been proactively addressing this issue. For example, four Senators have urged the Senate Judiciary Committee to take the lead in investigation of the Allergan-Saint Regis Mohawk Tribe Deal.28 The House Oversight and Government Committee, as well as several Senators, have requested that Allergan produce documents relating to its agreement with the Mohawk Tribe.29 Moreover, Senator McCaskill has introduced S.1948 titled “A bill to abrogate the sovereign immunity of Indian Tribes as a defense in inter partes review of patents” to address this issue.30

In the interim, Allergan has appealed the ruling in the district court case.31 If Allergan’s patents remain invalidated, the tribal agreement may have been an expensive but failing strategy to hold onto the market for Restasis. However, if Allergan succeeds in appealing, the IPR decision in the Restasis patents will have serious implications for Allergan’s market monopoly, as well as setting the precedent for “renting” sovereign immunity. While Oil States will eventually address the constitutionality of IPRs entirely, for now it remains to be seen how the PTAB will view the Tribe’s motion to dismiss the IPR for sovereign immunity.