Allergan Avails Itself of Sovereign Immunity

By Kevin E. Noonan --

The 11th amendment to the Constitution reads:

The 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.

The application of this principle in patent cases has been controversial, both in litigation (see "The Wall Street Journal's Problem with the U.S. Constitution") and as a shield against inter partes review, by states and in particular state universities claiming the immunity as "arms of the state" (see Covidien LP v. University of Florida Research Foundation Inc. and Neochord, Inc. v. University of Maryland).  Nonetheless, immunity is well established as to the several States.  Last week, Allergan creatively availed itself of this immunity by assigning patents challenged in IPR proceedings to the St. Regis Mohawk Nation (SRMN), which also has the capacity to invoke the protection of sovereign immunity against suit.

The Orange Book-listed patents, Nos. 8,629,111; 8,633,162; 8,642,556; 8,648,048; 8,685,930, and 9,248,191, protect Allergan's RESTASIS^® (Cyclosporine Ophthalmic Emulsion 0.05%), used for chronic dry eye.  Allergan paid SRMN $13.75 million upon transferring these patents, which SRMN licensed to Allergan for $15 million per year until the patents expire on August 27, 2024.  The benefits to both Allergan and SRMN can be appreciated by the estimates of revenues for RESTASIS^®:

(Chart obtained here.)

Allergan is not alone in entering into such arrangements; in August SRC (Cray) Labs LLC transferred patent rights to the tribe, and "dozens and dozens of tribes" are pursuing such arrangements, according to David Pridham, chief executive of Dominion Harbor Group as quoted by Reuters (see "Tech entity has tribal patent deal similar to Allergan's").

The concept of sovereign immunity stems from British common law, banning lawsuits against the king.  Although not explicitly stated in the Amendment, the Supreme Court has interpreted 11th Amendment immunity to extend to actions of a citizen against the state in which she resides.  Hans v. Louisiana, 134 U.S. 1 (1890).  The rationale behind the immunity conferred by the Amendment is that the "States entered the federal system with their sovereignty intact," Blatchford v. Native Village of Noatak, 501 U.S. 775 (1991), and that "the sovereign immunity of the States neither derives from nor is limited by the terms of the Eleventh Amendment.  Rather, . . . the States' immunity from suit is a fundamental aspect of the sovereignty which the States enjoyed before the ratification of the Constitution, and which they retain today," Alden v. Maine, 527 U.S. 706 (1999).  However, the immunity is not absolute.  It can be waived, and many states (as well as the federal government) have waived sovereign immunity in suits for tort and contract.  Certain U.S. Constitutional provisions trump the immunity, such as the Bankruptcy Clause and the 14th Amendment.  However, patent law does not fall within any federal law exemption, and the Supreme Court has decided expressly that States enjoy sovereign immunity against suits for patent infringement.  Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527 U.S. 627 (1999).

The various tribes of Native Americans have also been held to enjoy sovereign immunity, albeit with certain limitations that do not apply to the States.  The immunity stems from common law rather than by statute or Act of Congress, Turner v. United States, 28 U.S. 354 (1919), and has been applied both to state action and private suit.  United States v. United States Fidelity & Guaranty Co., 309 U.S. 506 (1940); Puyallup Tribe, Inc. v. Department of Game of State of Washington, 433 U.S. 165 (1977); and Kiowa Tribe of Oklahoma v. Mfg. Technologies, Inc., 523 U.S. 751, 755 (1998).

Congress has the power to abrogate tribal sovereign immunity, under the Supreme Court's decision in United States v. Lara, 541 U.S. 193, 200 (2004), that "the Constitution grants Congress broad general powers to legislate in respect to Indian tribes, powers that we have consistently described as 'plenary and exclusive.'"  However, Congress can do so only if the intent is "clear and unambiguous" or "unequivocally expressed."  Santa Clara Pueblo v. Martinez, 436 U.S. 49 (1978); see also Michigan v. Bay Mills Indian Cmty., 134 S.Ct. 2024 (2014).

For some this development, while on its face consistent with the law, rankles.  In earlier sovereign immunity cases the inventors (usually university personnel) were obligated (inter alia, under the Bayh-Dole Act) to assign their inventions to the university and state universities were readily recognized as arms of the state for whom the immunity applied.  Here, Allergan is unabashedly obtaining the benefit of tribal sovereign immunity in a commercial transaction.  While such a transfer is well within Allergan's rights to alienate these patents as a private property right, avoidance of IPR as not only a consequence but the express intent of the transfer distinguishes this use of sovereign immunity from other instances.  (And of course it remains to be seen whether patents are exclusively a private property right or more in the nature of a government grant, see Oil States Energy Services, LLC v. Greene's Energy Group, LLC).

Recent history suggests that, at a minimum, Congress will want to hear from the parties on this arrangement.  But in light of earlier controversies like Mylan's Epi-Pen cost increase and the Martin Shkreli affair at a Turing Pharmaceuticals, as well as more general concerns about patent quality and validity and increasing drug costs, it is likely that there will be some effort in Congress to prevent maneuvers such as this one.  The courts have made it clear that any limitation on SRMN's sovereign immunity is solely within the "plenary power" of Congress.  But passage of such a measure must remain in doubt in the current political climate, given the inability of Congress to pass legislation its members seem to be much more committed to than such an esoteric question as sovereign immunity, no matter how relevant the issue may be to their constituents' access to affordable drugs.

Allergan issued a press release on the transfer.

Comments

[Dan Feigelson]

Thanks Kevin. Two points you didn't mention with regard to the specific transaction here: first, IPRs have already been instituted against the Allergan patents in question; and second, a 5-day trial on the patents in ANDA litigation concluded in EDTX on September 1.

Those points nicely illustrate the fact that in the context of OB-listed patents, potential infringers who file a paragraph IV certifications will still have their day in court and an opportunity to challenge patents before launching a product; with respect to such patents, the invocation of sovereign immunity, should it be recognized as applying here, will merely move the situation back to what it was pre-AIA.

I suppose that formally, transferring the ownership of *non*-OB patents, including the sorts of patents asserted by trolls, to a tribe also moves the clock back to pre-AIA days. But it seems to me that other developments, apart from IPRs, have made trolling a less lucrative business since 2011. Maybe I'm wrong, and we'll start to see a flood of non-OB patents being transferred to tribes, which would undermine the rationale behind IPRs. But like you, I wouldn't count on Congress to act so quickly to remove tribal sovereign immunity even if that does happen.

[E.R. Pitcher]

This is an obvious legal abuse and must be remedied, as it is a "loophole" path to rapid destruction of the patent system and particularly the drug industry. In this legal climate there is apparently nothing to prevent states, ever hungry for more revenue, from entering the drug business, filing ANDAs seeking to market, for example, the ten top selling patented drugs, with a paragraph 4 certification that the orange book claims will not be infringed because applicant is a sovereigns and is immune from suit.

[Warren Woessner]

The Allergan decision was made in the context of a Hatch Waxman "situation", I believe, in which Allergan had already sued an ANDA filer. So the big question coming up is whether or not a patent holder can avail themselves of the federal courts to sue a competitor and later (or even prior to suit) shift the ownership of the patent to a tribe to block an IPR petition.

[Paul F. Morgan]

Kevin correctly points out that any Tribal Federal immunity [versus Federal control of tribal commerce] is judicial, not Constitutional, and thus can be removed to any extent that it wants to by Congress. But did the AIA already do that by allowing IPR petitions to be filed by any “person” other than the patent owner itself against any patent owner? Also, parties to an IPR must disclose the real party in interest and its privies.

[skeptical]

What does "judicial, not Constitutional" even mean?

Did some judge (common law or otherwise) drat up this notion of Indian nation sovereign immunity?

Can you provide the citation to that?

[Kevin E Noonan]

Thanks Dan for adding that - I presume we don't have a verdict in the ANDA litigation yet?

[Kevin E Noonan]

E.R.: just to be clear sovereign immunity hasn't applied for States under circumstances where the state owns a patent and enforces it. And here as Dan points out there has been ANDA litigation in this case. All that happened here is what has happened in other cases - applying sovereign immunity to preclude the patents being invalidated in an IPR. The Hatch-Waxman regime worked for 30 years before IPRs were created, to the extent that today 90% of drugs sold are generic. The system is working, and recall that there is a possibility (however remote) that the Supreme Court will invalidate IPRs in Oil States.

Thanks for the comment.