Intellectual Property

Why Assigning Patents To Native American Tribes To Avoid Inter Partes Review Is Bad Medicine

Here are three big reasons why, according to IP columnist Tom Kulik.

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Since the advent of the America Invents Act (“AIA”), patent practitioners and litigators have had to adjust prosecution, litigation and transactional strategies to account for the most significant changes to the U.S. patent laws since 1952. One on the most impactful changes under the AIA has been the introduction of the Patent Trial and Appeal Board (“PTAB”). At its core, the PTAB is an administrative body created to address issues of patentability, and its Trial Section has become a popular destination for parties to contest patent validity in what is known as inter partes review or “IPR”, an adversarial process used by the United States Patent and Trademark Office (“PTO”) to analyze the validity of existing patents.

Part of the rationale behind the implementation of the PTAB and a new IPR procedure was to address the heavy volume of patent litigation in the courts brought by non-practicing entities (“NPEs”) seeking to obtain revenue from patent portfolios they obtained and were seeking to monetize, essentially providing an alternate mechanism for post-grant review of patent claims (albeit on limited grounds based upon prior art). Since its implementation, IPRs in the PTAB have resulted in far more patents being completely invalidated (as opposed to just some, or none, of the claims in the patents at issue), becoming a weapon of choice to patent defendants seeking to invalidate the patents being asserted against them. Without question, IPRs have had a significant impact on patent practice and patent portfolios.

In yet another effort to game the system, ever-creative legal minds have found a way to theoretically bypass PTAB scrutiny by placing patents in the hands of Native American tribes in exchange for royalties, using sovereign immunity to evade PTAB jurisdiction. For example, Irish pharmaceutical company Allergan PLC recently transferred the patents to its popular eye drug Restasis to the Saint Regis Mohawk tribe in the State of New York, with an exclusive grant-back license to Allergan for an upfront fee and ongoing royalty. Allergan has been quite forthcoming that its rationale for doing so has been to “ strengthen the defense” of its Restasis patents in IPRs in the PTAB.

This strategy, however, will prove to be bad medicine and will likely go up in smoke far quicker than you may think. Here are three big reasons why:

1. Sovereign Immunity Is On Shaky Ground: While hiding behind the shield of sovereign immunity is an intriguing strategy, state versus tribal sovereign immunity are very, very different things. Native American tribes are subject to sovereign immunity through congressional action, while the states enjoy sovereign immunity under the 11th Amendment of the U.S Constitution. Amending the Constitution is far less likely than an act of Congress, and I wouldn’t bet on a patent protection strategy that is subject to congressional whim. In fact, Congress has opened an investigation into the Allergan transfer, and Senator Claire McCaskill has already submitted (albeit hastily) a bill in the Senate to prohibit transfers to Native American tribes that are structured to take advantage of tribal sovereign immunity. Given the tumultuous times in Washington, D.C. as of late, it’s good to remember: What Congress giveth, Congress can take away.

2. The Structure of the Licenses Is Questionable: When transferring patents to Native American tribes, the patent assignor becomes a licensee under a license that must grant enough rights to the licensee so as to ensure an enforceable license. In the Allergan example, Allergan retains exclusive rights to the patents in exchange for a $13.75 million up-front payment and $15 million per year ongoing royalty to the St. Regis Mohawk tribe. The tribe is prohibited from commercializing the patents, but is permitted to pursue continued research and development (which appears a questionable proposition at best).

As in any other patent license, the rights retained by the licensor and granted to the licensee are a balancing act. In the case of Allergan-style transfers, this balancing act becomes perilous – having too many rights retained by the Native American tribe impacts the licensee’s ability to commercialize the patents, while too few rights may draw actual ownership of the patents into question, defeating the purpose of the transaction and potentially removing the cloak of sovereign immunity. There is no clear answer to whether the structure of the Allergan patent license will survive scrutiny, and with the amount of money paid by Allergan upfront for the exclusive patent license, it’s one heck of an expensive risk (and more than some companies may be willing to bear).

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3. IPRs Are Not Court Proceedings…and That Matters. The entire sovereign immunity argument is premised upon PTAB IPRs (as part of the PTAB Trial Section) being similar to federal court litigation. Unfortunately for Allergan (and others trying to emulate their strategy), this premise is on shaky ground, and the Federal Circuit has sent up some smoke signals of its own that it may not agree with this correlation.

In Cuozzo Speed Technologies v. Lee (2016), in which the U.S. Supreme Court upheld the use of the “broadest reasonable interpretation standard” for reviewing patent claims in IPRs as “a reasonable exercise of the rulemaking authority that Congress delegated to the patent office,” Justice Breyer wrote in the majority opinion that “inter partes review is less like a judicial proceeding and more like a specialized agency proceeding.” The Federal Circuit seemed to agree with this perspective in a note within its decision rendered this past August in Ultratec Inc. and Captioncall LLC., stating that “[v]ery seldom do IPR proceedings have the hallmarks of what is typically thought of as a trial.” Moreover, the Supreme Court will be addressing the constitutionality of IPRs this Term in Oil States Energy Services, LLC v. Greene’s Energy Group. LLC – arguments that will likely further address how similar (or not) IPR proceedings are to litigation.

Don’t let your clients (or company) ignore the smoke signals on this strategy. Make no mistake, this issue is simmering and may boil over sooner than expected. Judge William Bryson, who is overseeing Allergan’s lawsuit against Teva Pharmaceutical and other companies to block the sales of generic versions of Restasis, has specifically asked the parties to brief “the question whether the [St. Regis Mohawk] Tribe should be joined as a co-plaintiff in this action, or whether the assignment of the patents to the Tribe should be disregarded as a sham” (emphasis added). I don’t know about you, but I for one do not want a judge presiding over a case for my client who openly thinks the strategy implemented for my client may be a “sham.” Allergan is in a tough position as a result, and its creative and carefully laid plans may just go up in smoke in the process.

Earlier: A New Patent Loophole? Paying Off A Native American Tribe To Exploit Its Sovereign Immunity

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Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at tom.kulik@solidcounsel.com.

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