In September of this year, drug maker Allergan Inc. made waves when it announced a creative licensing arrangement for patents relating to its eye drug Restasis that, it argued, allowed it to avoid PTAB review based on sovereign immunity.1 Allergan sold patents to the Saint Regis Mohawk tribe in New York for $13.75 million who then licensed them back to Allergan for annual royalty payments of up to $15 million.2 The drug Restasis, which is covered by the licensed patents, earned Allergan over $1.5 billion in revenue in 2016 alone.

The Allergan-Saint Regis arrangement apparently attempts to capitalize on recent PTAB decisions finding state universities immune from PTAB review based on state sovereign immunity. In January 2017, the PTAB dismissed IPR petitions filed by Covidien LP challenging a University of Florida patent related to health care computer information systems.3 In a case of first impression, the PTAB held that the U.S. Constitution’s 11th Amendment, which protects states from suit in federal court without consent, extended to IPR proceedings.4 And as an arm of the state of Florida, the University of Florida could claim immunity to Covidien’s challenge.5

Although the Covidien decision was not precedential, later this year the PTAB again applied sovereign immunity to an IPR challenge of a university-owned patent. In May 2017, the PTAB dismissed an IPR petition brought by NeoChord Inc. against a University of Maryland heart valve patent under the university’s 11th Amendment defense of state sovereign immunity.6 And in July 2017, the PTAB applied sovereign immunity in holding that an IPR petitioner could not compel a sovereign to join an IPR against its will.7 In that case, the sovereign entity, Regents of the University of Minnesota, was a co-owner of the patent at issue with a non-sovereign entity. While the PTAB applied sovereign immunity to Regents in dismissing Regents, it did not dismiss the IPR altogether. Instead, it held that the IPR could proceed in the absence of Regents by virtue of the co-owner representing Regents’ interests.8 None of these PTAB decisions have received Federal Circuit review.

Challenges to Watch For

Although Allergan’s licensing deal appears to take advantage of the PTAB’s recent decisions, whether Allergan can avoid PTAB review remains to be seen given the following challenges.

Whether Tribal Immunity Differs from State Immunity

As a preliminary matter, the PTAB’s earlier decisions involved state sovereignty, which differs from tribal sovereignty. Tribal sovereign immunity invokes issues of common law, which can be abrogated by Congress9, whereas state sovereign immunity is protected by the 11th Amendment. A constitutional amendment to eliminate state sovereignty is far less likely than congressional legislation to abrogate tribal sovereignty for IPRs, which at least one federal lawmaker has already proposed.

Whether the License Is Legitimate and Sufficient

Assuming tribal sovereign immunity does apply, the PTAB would likely evaluate the legitimacy and sufficiency of the transfer of rights under any assignment or license involving a tribe. And its decision may ultimately receive Federal Circuit review.

For example, in both Covidien and NeoChord, the university was an original owner of the patent brought into the IPR proceeding against its will. In contrast, Saint Regis only became the patent owner after the IPR proceeding had been instituted. The PTAB has yet to determine whether a post-litigation licensing deal with a tribe suggests a “sham” arrangement, such that the tribe is not the real-party-in-interest with a legitimate claim to immunity.10

Ample discovery may be needed in order to prove a “sham” exists, which could be invasive for the parties. Discovery may be sought on:

  • the assignment and license agreements between the tribe and the licensee and the consideration paid for those agreements;
  • the nature of the organization claiming immunity, to determine whether it is truly a sovereign entity, including bylaws, charters, or (for tribes) historical records and treaties;
  • who pays for and controls the litigation or IPR proceedings,11 for resolving real party-in-interest issues, including invoices or agreements relating to the responsibilities of the parties; and
  • any correspondence or agreements between the tribe and the licensee regarding the decision to transfer the patents, for resolving the true intent of the parties.

In addition, the PTAB may evaluate the license between Allergan and Saint Regis to determine whether sufficient rights were retained by the tribe. For example, in NeoChord, the Board evaluated an exclusive license agreement between the university and a non-sovereign entity and determined that the university retained sufficient rights in the patent to remain a necessary and indispensable party to the IPR proceeding. This suggests that tribes can grant licenses, even exclusively, without destroying immunity. But the tribe will need to retain sufficient rights in the patent, which will require the PTAB to evaluate the terms of the agreement—something in which the PTAB has no specialized expertise and may lack statutory authority to assess.

Whether IPRs Involve Public Rights

Future challengers may also try to frame patents as public rights, not private rights, which may invoke an exception to 11th Amendment immunity. Similar arguments were advanced, but rejected, in Covidien and NeoChord12. But the Supreme Court appears poised to answer the question of whether the IPR process involves public versus private rights in Oil States Energy Services, LLC v. Green’s Energy Group, LLC, on which it heard arguments in November 2017. A decision in that case is expected in early 2018.

Whether Licensing the Patent Waives Immunity

Petitioners seeking to challenge licensing arrangements like Allergan’s will also look to waiver arguments. Although a license alone may not destroy immunity,13 the PTAB has acknowledged that waiver could exist if the sovereign “has taken affirmative steps to invoke federal jurisdiction, such as filing suit as a plaintiff or seeking removal of a proceeding to federal court.”14

Because Allergan brought suit in district court against the generics manufacturers before transferring its patents to Saint Regis, waiver will certainly become a hot button issue in Allergan’s case. But the PTAB has not decided whether filing suit in district court amounts to waiver at the PTAB. And such a decision may ultimately be appealed to the Federal Circuit. In other forums, the Federal Circuit has held that a university’s filing of an infringement suit did not establish waiver for a declaratory judgment case “brought by a different party in a different state and a different district court.”15 The PTAB (and ultimately the Federal Circuit) will likely determine whether Allergan’s affirmative participation in the initial district court litigation waives its ability to invoke sovereign immunity in the IPR process, a separate proceeding that the generics manufacturers initiated.

Cases to Watch For

Allergan is not the only company taking advantage of the PTAB’s sovereign immunity analysis. Other companies have signed over certain rights to tribal entities, outside of the pharmaceutical context as well. For example, Prowire LLC sued Apple Inc. for infringement and, just three weeks before Allergan’s assignment, Prowire transferred its patent to MEC Resources LLC. MEC Resources LLC self-describes as a “small patent-holding company” with an office in North Dakota, and lists its state of origin in state records as “Affiliated Tribes.” And SRC Labs LLC recently transferred about 40 patents to St. Regis, according to patent office records.

Also while Allergan has maintained publicly that it does not intend to invoke immunity in the pending Eastern District of Texas litigation, its arrangement with Saint Regis has farther-reaching consequences. Companies who similarly sell patents to tribes may depart from Allergan’s altruism and refuse to consent to district court litigation, which could effectively insulate them from any invalidity challenge in any forum. The potential implications for such a drastic result, especially in the Hatch-Waxman context, has already drawn the attention of federal lawmakers. Both the House and the Senate have called for investigations of the Allergan deal, and legislation has already been drafted to block tribal sovereign immunity defenses at the PTAB.

Mylan Pharmaceuticals Inc. v. Allergan, Inc., IPR2016-01127 et al., Patent Owner’s Motion to Dismiss for Lack of Jurisdiction based on Tribal Sovereign Immunity, Paper 78 (P.T.A.B. Sept. 22, 2017).