Allergan’s Patent Deal and the Plight of Patent System
It’s been nearly 3 months since Allergan announced their “deal” with the St. Regis Mohawk Tribe and the national reaction and fallout has resulted in many different opinions. To recap: the deal consists of two transactions: in the first, Allergan assigned its orange book((The Orange Book is a catalogue of issued patents that cover FDA approved drugs.)) (OB) patents directed to its blockbuster drug Restasis in exchange for the tribe promising to assert its sovereign immunity in defense of the patents. The second transaction is in the form of an exclusive license wherein the tribe exclusively licensed the patents back to Allergan in exchange for an upfront payment of $13.75 million with subsequent annual royalty payments of $15 million for the remaining patent term. While there are issues and legitimate concerns involving this deal, much of the media covering the story has failed to adequately capture the real issue: I believe the US patent system is in trouble and this recent maneuver by Allergan can be viewed as an act of desperation rather than gamesmanship. Most of the coverage I’ve seen relies more on rhetoric that further conflates the issues and illicits emotional responses rather than facilitate open discussion. To be fair, in order to really understand the implications, we need to understand patent law generally, post-grant proceedings at the patent office, the Hatch-Waxman Act, the Bayh-Dole Act, pharmaceutical drug development and its associated costs, and sovereign immunity. So, down the rabbit hole we go.
State Sovereign Immunity vs. Tribal Sovereign Immunity
State Sovereign Immunity is rooted in the 11th amendment and prohibits a state from being sued in federal court by its own citizen or a citizen of another state, unless the state consents to jurisdiction; subject to certain exceptions. Tribal Sovereign Immunity is also rooted in the constitution, in so far as Congress’ exclusive authority to regulate commerce with “foreign nations” and levy taxes. Subsequent Supreme Court cases, particularly those concerning the 14th amendment and the passage of the Indian Appropriations Act of 1871, have also contributed to the genesis of Tribal Sovereign Immunity as we know it today, as it essentially operates just like State Sovereign immunity in that you can’t sue a tribe unless it consents to be sued. So why does this difference matter? To answer this question, we need to look into what’s happening at the Patent Office.
Inter Partes Review (IPR)
The passage of the America Invents Act (AIA) in 2013 ushered in an alternative venue to challenge the scope and validity of patents via administrative proceedings (collectively referred to as “Post Grant Proceedings”) that are carried out by a tribunal known as the Patent Trial and Appeal Board (PTAB). There are three types of post grant proceeding of which we will only be discussing IPRs as these have proven to be the most problematic and prejudicial if you are a patent owner. How is this so? First and foremost, there is no “standing” requirement. Standing is a judicial doctrine that essentially requires that a plaintiff seeking to bring a law suit actually establish that he or she has been harmed or injured by the actions of the defendant. IPRs do not impose this requirement; anyone who takes issue with any patent can petition the PTAB to initiate an IPR in the hopes that at least some of the claims in the issued patent will be invalidated((The challenger must establish a reasonable likelihood that they would prevail against at least one patent claim based on prior art consisting of patents and printed publications before an IPR will be initiated.)). To make matters worse, if a petitioner is unsuccessful on the first attempt, they can simply file subsequent petitions until they are successful because, well, there’s no double jeopardy protection for IPR. So once IPR is initiated by the PTAB, what procedural aspects make it a more effective venue for invalidating patents? The first thing you should take notice of is that the evidentiary standard((Highest to lowest respectively: Beyond a reasonable doubt, clear & convincing, and preponderance of the evidence. )) for challenging a patent is “lower” than that of the federal courts. IPR requires that the challenger prove invalidity by “preponderance of the evidence” whereas the district court requires that the evidence be “clear and convincing.” The second pitfall involves the patent claim construction; how the claims are to be interpreted. Under IPR, the claims will be given their “broadest reasonable interpretation” whereas the federal courts attempt to construe the claims as a “person of ordinary skill in the art((Patent speak for “artisan.”))” would understand them. In bringing greater clarity to this issue, it is helpful to think of patent claims as nets. In an infringement context, the wider, the better. You want broad-nets in order to “catch” as many infringers as possible. IPR turns this principle on its head in that now these nets are being cast with wider breadth so as to read on prior art as opposed to providing protection against infringement. It isn’t difficult to see how this formula inevitably leads to high invalidation rates which is exactly what we see((Current analyses suggest that 60% of claims challenged at the PTAB get invalidated https://www.patentattorney.com/ipr-statistics-revisited-yep-its-a-patent-killing-field/)); and while proponents of IPR would have us believe that the procedure is designed to “weed-out bad patents,” isn’t it somewhat disingenuous for an administrative agency who’s tasked with the examination and issuance of patents to then turnaround and invalidate those patents via less favorable claim-construction/evidentiary standards than what would otherwise be afforded by a court of law? The prejudicial nature of IPRs is further compounded by allegations of administrative abuse and misapplication of the law by the PTAB, such as: Administrative Patent Judges (APJ) not recusing themselves in IPRs involving former clients or employers, denying patentees the opportunity to amend claims despite a statutory basis to do so,((There is room for debate here. 35 U.S.C. § 316(d) (1) says that during IPR, “the patent owner may file 1 motion to amend…” which different from the absolute “right-to-amend.” )) stacking of the PTAB with APJs that would steer IPRs to a more desirable outcome((This is actually part of the public record per Yissum Research Development Co. v. Sony Corp. (Fed. Cir. 2015). http://www.ipwatchdog.com/2017/08/23/uspto-admits-stacking-ptab-panels-achieve-desired-outcomes/id=87206/)), and holding that an MRI machine is an abstract idea and therefore patent ineligible.((Ex parte Hiroyuki Itagaki – http://www.ipwatchdog.com/2017/01/03/ptab-mri-machine-abstract-idea-patent-ineligible/id=76554/))The inherent hostility presented by the procedures of IPR combined with the alleged misconduct by the administrators has led to the anointment of the PTAB as the “Patent Death Squad;” one that should be avoided by patent owners at all costs.
IPRs and Sovereign Immunity
The theory of sovereign immunity as a viable defense to IPR emerged earlier this year when the PTAB dismissed three separate IPR proceedings against patents owned by the University of Florida based on the university’s argument that as an “arm of the state,” the university was entitled to assert state sovereign immunity and that the IPRs against it should be dismissed accordingly. Naturally, this strategy proliferated and there is now a lineage of IPRs that have been dismissed on the grounds of state sovereign immunity. All the while this is happening, a lawyer and partner at Shore Chan DePumpo LLP, Michael Shore, figured that if a defense to IPR can be mounted on sovereign immunity, why not give tribal sovereign immunity a shot? Not long after, Shore was able to successfully broker a deal between Allergan and the St. Regis Mohawk Tribe((https://www.newyorker.com/magazine/2017/11/20/why-is-allergan-partnering-with-the-st-regis-mohawk-tribe)). It remains to be seen what will come of tribal sovereign immunity as it relates to IPRs as the PTAB has opened up the current proceedings involving Allergan/St. Regis Mohwak for additional amicus curiae briefing from interested third parties with a deadline for submission of December 1, 2017 and final written decision from the PTAB expected on or before April 2018. This of course, comes after a federal judge invalidated the Allergan patents in the parallel district court suit between Allergan and Teva. While the patents were invalidated pursuant to US Patent Law and the provisions of the “Hatch-Waxman Act (HWA),” Judge Bryson went on to voice his concerns with Allergan’s recent maneuver which ultimately prompted the current congressional investigation in addition to exacerbating the public condemnation of Allergan, the tribe, the pharmaceutical industry, and even the US patent system as a whole. As mentioned previously, there are legitimate concerns with this “deal,” but unfortunately most of the coverage has only served to further confuse rather than educate and inform. So, let’s now debunk some of the misconceptions and take a look at the real implications of this deal.
- This is not just another attempt by Big Pharma to “extend” its Patent Term
In addition to “extending the monopoly,” this tactic has also been characterized as a complete stifle to generic competition and an affront to the HWA which governs the conduct of brand-name and generic drug companies when it comes to patent disputes involving FDA approved drug therapies. This is simply not true. If anything, this tactic seeks to exclusively leverage the statutory framework of the HWA. Under the HWA, a generic company makes one of four certifications when filing an abbreviated new drug application (ANDA) with the FDA; the most prevalent being a paragraph IV certification which asserts that the OB patents are invalid or not infringed. The brand-name manufacturer must then file suit for patent infringement within 45 days of the ANDA filing by the generic competitor. Again, opponents of this recent maneuver by Allergan would have us believe that by owning the OB patents, a tribe could just avoid any and all litigation which seeks to challenge the validity of the OB patents. But under the current HWA framework, generic companies who are serious about trying to get their drugs to market don’t file lawsuits, they file ANDAs and the patent owner, in this case a tribe, must bring suit within 45 days; thereby consenting to the jurisdiction of the federal court in seeking to enforce its patent rights((“Declaratory Judgments” for patent invalidity brought by a generic company are typically counter punches in connection with the patent infringement suit triggered by the ANDA filing. The patent infringement suit allows the generic company to meet the standing requirement imposed by the courts but absent in IPRs.)). As for the extension? “Extension,” at least to me, implies going beyond the prescribed statutory period of 20 years and this maneuver doesn’t do that in the least bit. We now know that it is possible to challenge a patent via parallel attacks at the district court and patent office. We also know that of those 2 venues, IPR at the patent office is much more prejudicial if you are a patent owner. So in effect, what this tactic actually does is force the patent challenger/generic company to challenge the patent in a court of law rather than before an administrative tribunal with high invalidation rates.
2. How viable is this strategy really?
Perhaps the most perplexing question of this whole ordeal depends on whether you’re taking the long or the short view. In starting with the “bad,” the strategy is by no means bullet-proof. For starters, it is important to note that none of the preceding IPR cases involving sovereign immunity are binding on the PTAB. Which means that the PTAB doesn’t have to treat their previous decisions as precedent and could very well decline to afford St. Regis Mohawk and Allergan the defense of sovereign immunity while upholding state sovereign immunity for state universities and institutions. Furthermore, an upcoming decision by the Supreme Court in Oil States Energy Services LLC v. Greene’s Energy Group LLC (Oil States) could render this strategy moot as SCOTUS will be deciding the constitutionality of post grant proceedings. If SCOTUS holds IPR to be unconstitutional, then there will be no incentive for Allergan and other pharma companies to transfer their OB patents to tribes. A final decision for Oil States could take as long as June 2018. On the upside (for Allergan), is that every month of patent term means hundreds of millions of dollars in revenue generated from the sale of Restasis. And while this does in effect keep the price of the medication high, think about this: it takes 10-15 years and 2.5 billion dollars of R&D expenditure, on average, to get a drug to market at a 5-10% success rate((“Costs of Developing a New Drug,” Tufts Center for the Study of Drug Development; November 18, 2014. )). Furthermore, current ANDA practice under HWA allows generic competitors to circumvent having to fork out the hundreds of millions of dollars it costs to fund clinical trials((In an “Abbreviated” New Drug Application, the generic company must establish that the active ingredient is “bioequivalent” thereby obviating the need to repeat the multiple years of human clinical trials which incidentally costs the brand-name manufactures hundreds of millions of dollars.)) all while seeking to invalidate brand-name patents on 2 fronts. If successful, generic companies undercut the price of the brand-name manufacturer and severely diminish their efforts to recoup the R&D investment for the approved drug and, statistically speaking, the 9 failed attempts that preceded it. The current regulatory scheme provided by HWA combined with the relentless threat of fast and efficient patent invalidity via IPR have pitted Allergan and other similarly situated Pharma/Biotech companies in a corner to the point where such tactics seem almost inevitable. While abrogating sovereign immunity in the context of patent challenges (currently proposed by some members of congress) may seem like a quick fix, this would be the proverbial band aide on a nose bleed. Instead, the attention should be placed on fixing the underlying problem, which is a deteriorating patent system. Determining the constitutionality of the IPR process seems like a good start to me and we will have to wait and see how the PTAB and SCOTUS decide their respective cases before writing the last chapter of Allergan’s most recent moves.
This case still has a long way to go as it winds its way through the courts and public opinion. Stay tuned for more opinion and analysis. To receive updated posts on this topic please subscribe to the BRIDGES blog.
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