Will Allergan’s Questionable New Licensing Tactic Kill Inter Partes Review?

In 2015, Allergan, a powerhouse pharmaceutical company, filed suit against generic companies for patent infringement. Allergan, Inc. v. TEVA Pharms. USA, Inc., No. 2:15-cv-1455-WCB (E.D. Tex. Oct. 16, 2017) hosted by ipwatchdog.com. The claim alleged infringement of patents that cover Allergan’s blockbuster eye drug, Restasis. In hopes of invalidating the Restasis patents, defendants filed administrative challenges in front of the Patent Trial and Appeals Board (PTAB) using a procedure known as inter partes review (IPR). See, e.g., Mylan Pharms. Inc. v. Allergan, Inc., IPR2016-01132, Paper 3 (PTAB June 3, 2016). In a bold move to dismiss the IPR challenge, Allergan entered into an agreement with the Saint Regis Mohawk Tribe to transfer the Restasis patents. In exchange for $13.75 million and $15 million in annual royalties, the tribe agreed to accept the patent rights and then lease the rights back to Allergan. This novel maneuver allows the tribe to claim sovereign immunity in front of the PTAB, which could result in a dismissal of the IPR proceeding. Allergan and the tribe did not raise the issue of sovereign immunity in the pending district court litigation, and the case was decided in federal court in mid-October of this year.

Big Pharma has claimed that IPR is unfair to patent holders, and many have challenged this administrative procedure in federal court. Cooper v. Lee, 86 F. Supp. 480 (E.D. Va.), affirmed, No. 15-955 (Fed. Cir.), cert. denied, 137 S. Ct. 291 (2016); Cuozzo Speed Techs., LLC v. Lee, 136 S. Ct. 2131 (2016). So far, IPR has survived. However, a constitutional challenge to the procedure is currently pending before the Supreme Court, and oral argument will be heard later this month. Oil States Energy Servs. LLC v. Greene’s Energy Grp., LLC, 639 Fed. Appx. 639 (Fed. Cir.), cert. granted, 137 S. Ct. 2239 (2017). Constitutional issues aside, many proponents of IPR are worried that Allergan’s tactics will lead others to engage in similar exploitative behaviors. This, they fear, threatens the utility of IPR, a major part of the 2011 America Invents Act (AIA).

These concerns were addressed, but not solved, in the district court decision issued in October. Judge Bryson found the Restasis patents invalid by a clear and convincing evidence standard, but, in a separate order, he grappled with the issue of whether the contract between Allergan and the Saint Regis Mohawk Tribe was enforceable. He seemed troubled by the dubious nature of the deal but struggled to find grounds for unenforceability. Ultimately, he was compelled to accept the validity of the contract because he found there was consideration.

In the wake of this decision, it seems inevitable that the IPR proceedings brought against the Restasis patents will be dismissed by the PTAB for lack of jurisdiction. Although Allergan lost on the issue of validity in district court, the fact that the contract was found to be enforceable suggests that proponents of IPR were right to be concerned. The future of IPR seems to hang in the balance of three questions: (1) will the issue of enforceability be decided differently on appeal, (2) will legislative reform solve the issue, and (3) will other practitioners ignore Allergan’s lead, thus resulting in no practical effect?

The first question will only be answered in the case that the appellees raise the issue of enforceability on appeal. Even in this instance, it is unlikely that the Federal Circuit would find the contract unenforceable. Judge Bryson seems to have correctly decided that there is consideration for the contract. The most obvious alternative for finding unenforceability would be on public policy grounds. Henningson v. Bloomfield Motors, Inc., 32 N.J. 358 (1960). Although courts are reluctant to invalidate contracts under this doctrine, one could argue that contracts allowing parties to avoid IPR challenges represent a unique group of cases in which the clear interest of Congress is being evaded. Still, the monetary interest of the tribe and the strong presumption of free will in contract law both make it unlikely that a court would extend this reasoning here.

It is more likely that legislative reform, by way of a bill introduced by Senator Claire McCaskill, will render such practices ineffective. In addition to drafting this bill, Sen. McCaskill also called on the Pharmaceutical Research and Manufacturers of America (PhRMA) to condemn Allergan and to review the questionable methods taken. Her view reflects one shared by other lawmakers—that profit-driven pharmaceutical companies are abusing the patent system at the expense of the American public. It was the intent of Congress, they argue, in creating IPR, to allow bad patents to be invalidated more efficiently. This change was meant to stop abuses. However, many have argued that IPR has merely enabled hedge fund managers and patent trolls to take advantage of the system, unfairly pressuring patent-holders. Given the different political landscape of Congress since the AIA was passed in 2011, it is questionable whether any legislative solution will come of this debate.

Finally, there is still the possibility that this licensing practice will not have any practical effect. Even though it theoretically creates a “loophole” that allows powerful companies to avoid IPR proceedings, it is not certain that this practice will be popular among members of the industry. Roughly two-fifths of IPR challenges to pharmaceutical patents are not instituted, meaning there is no need for some companies to enter into these sorts of agreements. Beyond that, many of these disputes end in settlements. It is not clear that paying a Native American tribe to lease patent rights is more efficient or cost-effective than settling the IPR without pulling in a middle man. Not only is Restasis a billion-dollar drug, but it was also protected by patents that seemed particularly susceptible to invalidation. The susceptibility of these patents is illustrated by the fact that they were invalidated in district court under a higher standard than is required in IPR proceedings. It could be the case that the specific facts made it worthwhile for Allergan to take this risk, but these facts will not be the same for other corporations. After all, IPR has existed for more than five years, and this is the first company to try such a tactic. Only time will tell whether this was because no other drug manufacturers had thought of the idea—or whether it simply is not desirable in the majority of cases.

If the enforceability of this contract is affirmed, legislative reform fails to pass, and other corporations begin to exercise these agreements, then we will see the decline of IPR and the rise of IP transactions. Whether this is beneficial or detrimental is still a matter of dispute.

Madeline Byrd is a J.D. candidate, 2019, at NYU School of Law.