Did Allergan Find a Loophole in the IPR System?

I’ve previously written about how Inter partes review (IPR) have become a popular and effective way by which third parties can challenge existing patents. Recent statistics about IPRs show that when an instituted IPR challenge reaches a final written decision, challenged patent claims are invalidated around 67% of the time while being upheld less than 20% of the time. With such unfavorable numbers, it is no surprise then that patent owners are trying to find ways to protect themselves from IPRs.

As a defense against this IPR challenge success rate, some patent owners have taken the stance that the IPR process is unconstitutional. They argue that the practice should be barred because it extinguishes important property rights, i.e., patent rights, without the use of a jury. The United States Supreme Court recently found this question worthy of review and granted certiorari in Oil States vs. Greene’s Energy Group, et al. (No. 16-172 S.Ct., Supreme Court 2017) to address the issue. A decision in this case will likely issue next summer.

In the meantime, Allergan, PLC, a major pharmaceutical company, has taken the defensive approach one step further. On September 8, Allergan announced that they entered into an agreement with the Saint Regis Mohawk Tribe (the Tribe) in which Allergan transferred ownership of all Orange Book-listed patents for RESTASIS® (Cyclosporine Ophthalmic Emulsion) 0.05% to the Tribe, while being granted exclusive licenses in the patents related to the product. The patents transferred to the Tribe include U.S. Patent Nos. 8,629,111; 8,633,162; 8,642,556; 8,648,048; 8,685,930 and 9,248,191. Under the terms of the agreement, the Tribe will receive $13.75 million upon execution of the agreement and will be eligible to receive $15 million in annual royalties. 

As the new owners of the patents, the Tribe is filing a motion to dismiss the ongoing IPRs of the RESTASIS® patents based on their status of being a recognized sovereign tribal government to which sovereign immunity applies. The concept of sovereign immunity is found in the Eleventh Amendment to the U.S. Supreme Court which reads:

“Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State.” U.S. CONST. AMEND. XI.

Sovereign immunity essentially prevents the government or its political subdivisions, departments, and agencies from being sued without its consent.

The Tribe’s arguments, and by extension Allergan’s defensive theory, rely on recent rulings such as Covidien LP v. University of Florida Research Foundation Inc., case numbers IPR2016-01274, IPR2016-01275 and IPR2016-01276, in which the PTAB dismissed IPR proceedings against the University of Florida Research Foundation (UFRF) based on the university’s claims of sovereign immunity. In that case, the PTAB held that a patent owned by a State, or by an owner who can establish that it is an arm of the State, is exempt from an IPR challenge because of sovereign immunity afforded by the Eleventh Amendment.

In determining whether the university was an “arm of the state” and thus protected by sovereign immunity, the PTAB looked at four factors:

(1) how state law defines the entity;
(2) what degree of control the State maintains over the entity;
(3) where the entity derives its funds; and
(4) who is responsible for judgments against the entity. 

In applying this four-factor test, the panel found, among other things, that “the degree of control exercised over UFRF by the State of Florida and the University of Florida weighs in favor of finding that UFRF is a state instrumentality,” that the “UFRF’s assets and liabilities are considered to be a component of the University of Florida’s finances,” and that UFRF’s bylaws “demonstrate the University’s control over UFRF’s finances.” Furthermore, the parties did not dispute that the University of Florida is an arm of the State of Florida. As a result, the panel concluded that the weight of the evidence supported a finding that “UFRF is an arm of the State of Florida.” 

By transferring ownership of its patents to a sovereign tribal government, Allergan is hoping to protect its patents, and thus its product, from being susceptible to IPR attack. Based on the holding in Covidien, a key factor to its success will be whether the Tribe is an “arm of the State”.

Given the increasing popularity of IPRs and their high rate of claim cancellation, this move by Allergan may highlight a loophole in the IPR process that would provide a valuable advantage to any patent holder seeking to protect its patent portfolios. If Allergan’s actions are found to be within the scope of sovereign immunity, I would imagine that more patent holders would consider this strategy when facing an IPR challenge. In fact, it looks like other tech companies are already following Allergan’s move. On the other hand, if the Tribe is not found to be an “arm of the State”, then Allergan may not be able to avail itself to the sovereign immunity defense.

Allergan’s move to avoid an IPR attack adds fuel to the ongoing debate over the legality, effectiveness, and policy goals of IPR proceedings. We will keep you informed of developments related to IPRs as they occur.