dddd
PublishedSeptember 12, 2017

Why Pay For Delay When You Can Pay For Immunity

What do Seymour Cray’s high-performance computing research company SRC Labs and drug manufacturer Allergan have in common?  Both SRC Labs and Allergan sold patents to the Saint Regis Mohawk Tribe, then licensed them back from the tribe, in order to use tribal sovereign immunity to prevent challenges to their patents as invalid.

A Refresher Course On Sovereign Immunity

Sovereign immunity is the legal doctrine that you can’t sue the sovereign without their consent.  It stems from the English notion that you couldn’t drag the King into court unless he agreed to come, and was codified in the Eleventh Amendment prohibition on “any suit in law or equity, commenced or prosecuted against one of the United States” by an individual in federal court.

Native American tribes have a similar immunity, referred to as tribal sovereign immunity, which stems from their status as sovereign entities and the common-law principle that you can’t sue a sovereign without consent.  However, Congress can legislatively abrogate Native American sovereignty, which the Supreme Court has generally disfavored with respect to Eleventh Amendment sovereign immunity.

But unless the immunity is waived or abrogated, the end result is that when you sue a sovereign without their consent, your lawsuit gets thrown out.

Sovereign… Patents?

Sovereign immunity is not a topic that appears on many Patent Law syllabi.  But in the past year, it’s become a more pressing issue when it comes to patents.  First, state universities used it to avoid challenges to their own patents.  And now, sovereign immunity is being sold to completely unrelated companies.

The University of Florida Research Foundation (UFRF) is a non-profit foundation established by the University in order to “to promote, encourage and provide assistance to the research activities of the University faculty, staff and students.”  As part of this, they patent inventions by UF faculty and staff, and license those inventions.

Covidien (a medical device manufacturer) had a patent license agreement with UFRF.  UFRF sued Covidien, and in response Covidien defended themselves by filing inter partes reviews (IPRs) against the UFRF patents.  Back in January, UFRF claimed that, as a state entity, they were immune from IPR under Eleventh Amendment sovereign immunity.  The Patent Trial and Appeal Board agreed and dismissed the IPR on Eleventh Amendment grounds.

Later in the year, a similar situation occurred, this time featuring the University of Maryland and NeoChord, another medical company.  Maryland had given an exclusive license to several of their patents to Harpoon Medical, which sued NeoChord.  NeoChord filed an IPR on the patents, and again, the PTAB dismissed the IPR on Eleventh Amendment grounds.

There are a few other instances of Eleventh Amendment immunity claims that may come up, including one by the University of Minnesota against Ericsson.  

Up until recently, these were all cases where the originator of the patent, or their licensee, claimed sovereign immunity.

Last week, that changed.  For the first time, we saw an instance in which sovereign immunity was essentially being bought and sold.

Allergan-ic To IPRs?  Hire A Sovereign

Allergan is the manufacturer of the successful drug RESTASIS, used to treat chronic dry eye.  RESTASIS brought Allergan $336.4 million in revenue in the second quarter of 2016.  But the original patents on RESTASIS expired in 2014, and generic drug makers began to prepare to make competing products.  Allergan managed to obtain a set of very narrow patents covering highly specific concentrations of active and inactive ingredients that don’t expire until 2024, and has been attempting to use those patents to maintain their market exclusivity on RESTASIS.  Generic drug makers filed Abbreviated New Drug Applications (ANDA) claiming that the RESTASIS patents were invalid.  Allergan sued the generic companies, and the generic companies responded by filing IPRs to invalidate those patents.

Back in December, the PTAB agreed that the generic companies had shown a reasonable likelihood that Allergan’s patents were invalid.  Allergan, unsurprisingly, was not thrilled with this development.  

Going Back To The S(ou)RC(e)

Allergan wasn’t the first one to use this licensing structure.  A month earlier, SRC Labs (a high-performance computing company founded by Seymour Cray) had sold a set of patents to the Saint Regis Mohawk tribe.  Those patents aren’t currently involved in litigation, nor have they had an IPR filed against them.  However, a litigation campaign is planned, according to the tribe’s own FAQ on this program, so the purchased immunity is probably intended to shield that campaign.

This wasn’t Allergan’s idea, and it probably wasn’t SRC Labs’ idea, or even the Saint Regis Mohawk Tribe’s idea.  It seems to trace back to Chris Evans, a Dallas lawyer at Shore Chan DePumpo LLC, who primarily represents universities in their patent licensing and litigation efforts.  He’s the name on the SRC Labs transaction, and the New York Times reports that the Shore Chan firm proposed the idea to the tribe.

Someone Here Is Misinformed

The tribe’s FAQ on this program is interesting.  I don’t know if they got the wrong impression from their lawyers, just misunderstood, or what, but they claim that by doing this, they can help “protect[] from patent trolls.”

Bluntly put, preventing patents from being IPRed does not protect anyone from patent trolls—it protects patent trolls from IPRs.

The tribe also claims that IPR is “very unfair” and allows patent trolls to void valid patents.  (Patent trolls do not generally try to invalidate patents, because they usually don’t have any products to be sued on.)  The tribe also claims that they’ll file to have their patents reviewed in federal court, which, again, does not happen.

If IPR is unfair, why does the Federal Circuit affirm three quarters of appealed PTAB decisions?  The PTAB is getting decisions right, there’s just a lot of invalid patents out there to be challenged.

What’s In It For The Tribe?

For one thing, a significant amount of money.  The tribe’s annual budget is approximately $50 million dollars.  They’ll receive $14 million as an initial payment, and $15 million in royalties each year.  (On the SRC Labs patents, they’ll receive a share of any litigation proceeds—the Shore firm is handling the litigation on a contingent fee basis, so presumably the revenue will be split between the tribe, SRC Labs, and the law firm.)

And what does the Saint Regis Mohawk tribe have to do to make that money?

They have to “hold the patents, get assignments, and make sure that the patent status with the US Patent Office is kept up to date.”  (That’s about an hour’s worth of work for a paralegal.)

That’s it.

Will This Work?

That’s a good question.  Some very smart people think it might. [1][2][3].  Those same smart people who think this will work also think it will destroy the entire Hatch-Waxman generic drug structure that provides cheaper drugs.  

But then again, there’s a number of people—including on the Supreme Court—who are more skeptical of tribal sovereign immunity being applied to commercial enterprises, much less enterprises that are structured simply as shells to avoid legal consequences.  

The notion that commercial activity might not be subject to sovereign immunity is one shared by one of the more unusual pairings on the Supreme Court—both Ruth Bader Ginsburg and Clarence Thomas concurred in the Lewis v. Clarke case last term, noting that tribal commercial activity with non-tribal members should not be immune with respect to laws of general applicability.  

And while the tribe is receiving a portion of the proceeds of any litigation, that kind of privateering arrangement has been used before; a mere interest in the proceeds of litigation isn’t enough to make you a real party in interest—you keep yourself out of the litigation.  (The patent owners in privateering cases don’t typically maintain ownership of the patents, which may make a difference.)

That matters because the majority opinion in Lewis v. Clarke focused on whether the tribe was the real party in interest with respect to the litigation.  As it wasn’t, tribal sovereign immunity didn’t apply.

So there’s possibilities on either side—we just don’t know yet.

Should This Work?

No.

Sovereign immunity, especially for tribes, is an important concept.  But for the patent system?  To quote Derek Lowe, who writes about drug development (and sometimes patents), “‘the validity of your patents is subject to review, unless you pay off some Indian tribe’ does not seem like a good way to run an intellectual property system.”

That kind of system disfavors smaller inventors, who aren’t going to have the resources to buy sovereign immunity.  It also disfavors large companies, who are stuck paying more money to try to invalidate a patent in federal court, even though the IPR procedure is significantly cheaper and faster.  It tends to make it harder for small generic drug manufacturers, because they lose any avenue to challenge patents before they begin manufacturing, forcing them to launch a drug at risk of a significant judgment against them.  It doesn’t even favor companies with valid patents, because they’re going to have to pay more to immunize their patent portfolio than they’d have paid to just defend the IPR, and they’re still going to have to defend their patents in court if they assert them.

The only people who benefit?  People who own shaky patents that they want to assert, patents that would have been invalidated in IPRs.  SRC Labs and Allergan have signed up, so far, and a third (unnamed) company is finalizing negotiations, according to the tribe.  

And going further—what prevents The Pirate Bay from selling their operations to a tribe, licensing them back, and claiming they’re immune from lawsuits?  Could this sort of purchased immunity protect against product liability claims, by placing ownership of the design with a tribe?

I’d expect to see more reports of this type of structure coming up soon, including patent assertion entities transferring entire portfolios to tribes prior to starting litigation campaigns.  Hopefully, the courts will see the problem here and favor the view set out in Lewis v. Clarke—the real party in interest in these proceedings isn’t the tribe, and tribal sovereign immunity doesn’t apply.

Josh Landau

Patent Counsel, CCIA

Joshua Landau is the Patent Counsel at the Computer & Communications Industry Association (CCIA), where he represents and advises the association regarding patent issues.  Mr. Landau joined CCIA from WilmerHale in 2017, where he represented clients in patent litigation, counseling, and prosecution, including trials in both district courts and before the PTAB.

Prior to his time at WilmerHale, Mr. Landau was a Legal Fellow on Senator Al Franken’s Judiciary staff, focusing on privacy and technology issues.  Mr. Landau received his J.D. from Georgetown University Law Center and his B.S.E.E. from the University of Michigan.  Before law school, he spent several years as an automotive engineer, during which time he co-invented technology leading to U.S. Patent No. 6,934,140.

Follow @PatentJosh on Twitter.

More Posts

The Judicial Conference Takes on “Judge Shopping”

On March 12th, the U.S. Judicial Conference announced policy recommendations aimed at putting an end to “judge shopping,” the much-exploited practice by which litigants choose the judges who hear ...

Guest Post: Time to Shine Light on Dark Third-Party Litigation Funding

This post, written by Jerry Theodorou, initially appeared in the R Street’s Real Solutions Blog A pitched battle between proponents and opponents of third-party litigation financing (TPLF) has en...

Another Litigation Funding Dispute

In what has become a recurring topic on Patent Progress, another dispute between a patent troll and a litigation funder has emerged. This time, it is between the Irish NPE, Arigna Technology; its law ...

Subscribe to Patent Progress

No spam. Unsubscribe anytime.