Double jeopardy at the PTAB forces Allergan and others to seek sovereign immunity defenses

On September 8th, the multinational pharmaceutical firm Allergan (NYSE:AGN) announced that it had entered into an agreement with the St. Regis Mohawk Tribe which granted ownership of Orange Book-listed patents covering the dry eye treatment Restasis to the St. Regis tribe. As part of the deal, Allergan was granted an exclusive license by the tribe to practice the pharmaceutical technology covered by the patents. The agreement afforded the St. Regis tribe the ability to pursue diversification of their economy while the sovereign immunity of the tribe gave the patents a strong defense at the Patent Trial and Appeals Board (PTAB), the agency at which the Restasis patents were being challenged for patent validity.

The Allergan/St. Regis patent move has been controversial for many reasons, not the least of which is that it shines some light on issues with patent validity trials such as inter partes review (IPR) at the PTAB which were enacted by the America Invents Act (AIA) of 2011. Allergan’s rival drugmaker Mylan, the petitioner of the IPR, called the deal a “sham” transaction during hearings at the PTAB. Sen. Claire McCaskill (D-MO) introduced a highly discriminatory bill to the U.S. Senate which would abrogate tribal sovereign immunity only for Native American tribes and only in IPRs; the bill would not prevent state agencies from succeeding on a sovereign immunity defense at the PTAB. In the House of Representatives, a bipartisan group from the House Judiciary Committee have called for a probe of the Allergan/St. Regis agreement for potential unfair practices impeding competition in the pharmaceutical sector.

The news media has also been thrown by the whole scenario. Bloomberg called the deal “ugly.” Newsweek questioned whether the calls from Sen. McCaskill and others to probe the deal and nix sovereign immunity were tinged with racism. Seeking Alpha published a piece saying that Allergan had brought “the roof down on its head” after the patents assigned to the St. Regis tribe were invalidated in Hatch-Waxman proceedings in the Eastern District of Texas. Even the federal judiciary seems to be scratching their heads over the situation. Judge William Bryson, the Eastern Texas judge declaring the Restasis patents invalid, went to great lengths to question the legitimacy of the Allergan/St. Regis deal, which seems incredible given the fact that the tribe’s sovereign immunity defense was never an issue in the Eastern Texas case.

This May, the official blog for IP transaction and advisory firm Dominion Harbor Group republished an article from Corporate Counsel which was authored by Brad Sheafe, Dominion Harbor’s chief IP officer. The article goes in-depth into data available through Docket Navigator which showed that the PTAB essentially puts patent owners at risk of double jeopardy on a routine basis. As of May 12th, motions to dismiss were raised in a total of 677 PTAB trials on the grounds that petitioners were submitting the same or substantially similar prior art from a previous petition, or they petitioned the same patent using the same argument. When combining complete denials and denials-in-part, the data shows that the PTAB has only granted such motions in 189 cases, only 28 percent of the total number of cases in which the issue is raised.

Those statistics are interesting given the fact that, if the PTAB were correctly following Congressional statutes from the AIA regarding PTAB activities, one would think that such motions to dismiss would likely be granted at a higher rate. Motions to dismiss petitions at the PTAB based on similar prior art or arguments are governed by 35 U.S.C. § 325(d). This particular statute says that the Director of the U.S. Patent and Trademark Office may take into account whether a petition filed at the PTAB raises “the same or substantially the same prior art or arguments” previously presented to the USPTO in other petitions. If this is the case, the USPTO Director then has the discretion to reject the petition. Clearly, this statute is meant to prevent double jeopardy in validity trials at the PTAB.

It’s certainly possible that the high rate of denial for motions to dismiss under Section 325(d) are due to poorly written or reasoned motions but the PTAB has given stakeholders in the U.S. patent system plenty of reason to question its motives. In final written decisions, 85 percent of patents are deemed defective by the PTAB and that rate increases to more than 90 percent of patents challenged at the PTAB being found defective when taking into account settlements. In a recent hearing at the Court of Appeals for the Federal Circuit, counsel representing the USPTO admitted that the agency’s Director stacks the panel of administrative patent judges (APJs) on PTAB trials in order to achieve policy objectives. That’s not justice, that’s politics. Further, the PTAB has refused to follow patentability standards set out by the U.S. Supreme Court in at least one PTAB case in which the petitioner Telebrands is clearly guilty of infringement.

The PTAB subjects all patent owners to double jeopardy, but the situation is particularly bad for pharmaceutical companies which already have to face a Congressionally-mandated validity review process under the Drug Price Competition and Patent Term Restoration Act, colloquially known as Hatch-Waxman. This law creates a regime by which a generic drugmaker can file an abbreviated new drug application (ANDA) with the U.S. Food and Drug Administration (FDA). The branded pharmaceutical listed in the Orange Book will be covered by patents but the generic drugmaker can include a Paragraph IV certification in the ANDA, a declaration that the patents covering the Orange Book-listed drug are unenforceable and invalid. When a company like Allergan has to face Hatch-Waxman validity trials in federal district court and serial IPRs at the PTAB, it turns Allergan’s Restasis patents into piñatas taking hit after hit at multiple forums before being finally ripped asunder at some point.

From at least one angle, the PTAB’s deleterious effects on patent rights could have an actual and negative effect on our country’s healthcare system. Companies invest in research and development to create new drugs and through trial and error it costs about $2.55 billion to develop a new drug. That investment into research and development can be protected with patents to give the drug developer the ability to hold the exclusive market rights to the drug they developed. That starts a virtuous cycle by which the original innovator can make money from an in-house innovation which can then be invested back into research and development. That means new drugs to treat cancer and other life-threatening diseases, or less serious chronic conditions like the dry eye treated by Restasis. Of course, a company could choose to spend that money elsewhere, but a competitive innovator will come along with a better product at some point so the original inventor has an incentive to innovate to stay ahead. Without patents, copycats are rewarded to the detriment of the truly inventive and the innovators have no reason to innovate if they can’t protect the IP. The message then becomes: “Don’t work harder, just cheat and get ahead.” And this is a message reinforced time and again by the Director of the USPTO whenever a motion to dismiss on Section 325(d) grounds is denied in violation of the statute.

Generic drugmakers and unscrupulous hedge fund managers who make money by short selling pharmaceutical stocks and then filing a petition to challenge validity are rewarded by the PTAB; inventors are not. But there is the chance that the U.S. Supreme Court could decide to reinforce that it is the highest court in the land in the face of an Article I tribunal which has shown an unwillingness to listen to its judicial standards. This June, SCOTUS granted writ to hear Oil States Energy Services, LLC v. Greene’s Energy Group, LLC, a case which will decide whether the PTAB and patent validity challenges through that agency violate the U.S. Constitution by extinguishing property rights through a non-Article III forum without a jury. Oral arguments in that case will be heard on November 27th of this year.

Yet there is plenty of reason for concern that patents covering Restasis and other perfectly patent-eligible inventions will suffer from the harmful effects of IPRs and other PTAB trials before the Supreme Court can take any action beneficial to patent owners in Oil States. The Supreme Court has shown an unwillingness to disrupt what it views as Congressional intent on patent law in cases such as Cuozzo Speed Technologies, LLC v. Lee. The unintended problems and abuses of the IPR process at PTAB would concern any patent owner and naturally drive a party like Allergan to seek out an arbitrage opportunity with the St. Regis Mohawk Tribe to protect assets from the PTAB while engaged in Hatch-Waxman litigation. There’s no guarantee that judicial or legislative reform will come soon enough to protect patent owners from a flawed process and thus Allergan and others have been forced to seek out a sovereign immunity defense to stand a fair chance at having their patent rights enforced in district court.


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