Much Ado About Nothing: Tribal Sovereign Immunity In Inter Partes Reviews

I predict that tribal sovereign immunity will have little, if any, effect on inter partes reviews (IPRs). But if I’m wrong (and I’ve *occasionally* been wrong before), tribal sovereign immunity will lead to the death of IPRs, absent Congressional action. This is because, if my analysis is wrong, and absent abrogation of tribal sovereign immunity by Congress, anyone who can scrape together enough money to buy a Tribe’s sovereign immunity can put an end to an IPR.

Last month, Allergen announced that it would pay a Native American Tribe (Saint Regis Mohawk Tribe) $13.75 million for the Tribe to become the owner of a portfolio of Allergen’s patents—with the patents then being exclusively licensed back to Allergen. (The Tribe is also eligible to receive $15 million in additional annual royalties from Allergen.)

Why would Allergen pay the Tribe to take ownership of Allergen’s patents? So that the patents would hopefully be immune (based on the Tribe’s sovereign immunity) from inter partes review proceedings. Allergen had asserted the patents-at-issue in a lawsuit filed in the Eastern District of Texas against defendants Mylan, Teva, and Akorn in 2015. The defendants then placed the patents into an IPR before the PTAB.

After the announcement of the Allergen-Tribe deal, the Tribe immediately filed a motion to dismiss currently pending IPR proceedings based on Tribal sovereign immunity. (The motion to dismiss is available here). The Tribe argues in the motion that Congress has not unequivocally waived its sovereign immunity, and neither has the Tribe. Further, the Tribe asserts that the IPR cannot proceed without the Tribe (as it claims to be an indispensable party).

It appears as if three prior PTAB decisions involving state universities served as the impetus for the deal and the Tribe’s subsequent motion to dismiss:

  • Covidien LP v. University of Florida Research Foundation Inc., IPR2016-01274 (PTAB, Jan. 25, 2017) (available here): The PTAB determined that the University of Florida, as an arm of the State of Florida, was entitled to a sovereign-immunity defense to the institution of an IPR of the challenged patent. Accordingly, the petition was dismissed. (The University of Florida had filed an action against the petitioner in Florida state court alleging breach of a license contract between the parties. Petitioner then filed three petitions requesting IPRs of the relevant patent.)
  • Neochord, Inc. v. University of Maryland, IPR2016-00208 (PTAB, May 23, 2017) (available here): The PTAB granted the University of Maryland’s motion to dismiss and terminated the IPR. The University had exclusively licensed its patent to Harpoon Medical. Although the petitioner argued that the IPR could proceed solely against Harpoon Medical, the PTAB disagreed: “the University remains a necessary and indispensable party to this proceeding, and we cannot proceed without the University” because the “University has retained rights under the license agreement, and transferred less than ‘substantially all’ rights to Harpoon Medical.”
  • Reactive Surfaces Ltd. v. Toyota Motor Corp., IPR2016-01914 (PTAB, July 13, 2017) (available here): The PTAB found that, due to sovereign immunity, the Regents of the University of Minnesota could not be compelled to join the IPR against their will, but nevertheless held that the proceeding could continue in their absence against co-patent owner Toyota.

With respect to the Allergen-Tribe deal, I believe that what will eventually result in the rejection of the Tribe’s sovereign-immunity defense will be the fact that it must become a party to the district-court litigation proceedings (as it is now the owner of the patents) and will affirmatively assert patent infringement against the defendants in that litigation. Accordingly, I believe that the PTAB and (subsequently) the courts will find that, by becoming a party to federal district court litigation and accusing defendants of infringement, the Tribe has waived its sovereign immunity in the corresponding IPRs.

For example, in Covidien, the panel intimated that a state that owned a patent could waive its sovereign-immunity defense by bringing a “related federal district court patent infringement (or declaratory judgment of validity) case.” In Neochord, the panel stated that “mere participation in judicial proceedings does not create a waiver unless the State has taken affirmative steps to invoke federal jurisdiction, such as filing suit as a plaintiff or seeking removal of a proceeding to federal court.” In support, the panel cited Lapides v. Bd. of Regents of Univ. Sys. Of Ga., 535 U.S. 613 (2002) and Vas-Cath, Inc. v. Curators of University of Missouri, 473 F.3d 1367 (Fed. Cir. 2007). In Lapides, the Supreme Court held that a state waived sovereign immunity by removing a lawsuit from state court to federal court. In Vas-Cath, the Federal Circuit determined that the University of Missouri waived its Eleventh Amendment defense to an interference appeal to federal district court by affirmatively seeking the interference in the first instance.

All of this said, I’m guessing Allergen has some pretty smart attorneys on its payroll, and it wouldn’t shell out over $13 million to purchase sovereign immunity if it didn’t think the Tribe’s sovereign-immunity defense had a very good chance of succeeding. But the deal strikes me as too cute by half—and these types of “schemes” rarely hold up in court. My prediction is that they certainly won’t hold up before the PTAB, where salaries of ALJs are on the line if purchasing tribal sovereign immunity can end an IPR.

If I’m wrong on waiver, I believe Congress will step in with a waiver-of-sovereign-immunity-fix. Or perhaps the Supreme Court, in Oil States, will strike down IPRs altogether. We shall see.

Of note, Judge Bryson of the Federal Circuit, sitting by designation in the Eastern District of Texas, has suggested that private parties cannot purchase tribal sovereign immunity. In Judge Bryson’s opinion concerning the Tribe’s intervention in Allergen’s district-court case (available here), he noted that he had previously directed the parties in the district-court litigation to “file briefs addressing the question whether the Tribe should be added as a co-plaintiff [with Allergen] or whether the assignment transaction should be disregarded as a sham.” In connection with the Court directing Allergen to disclose what consideration it received in exchange for the purported assignment of the patents-in-suit to the Tribe, Allergen “stat[ed] that the consideration for the assignment of the patents to the Tribe was the Tribe’s promise not to waive its sovereign immunity with respect to any IPR or other administrative action in the PTO related to the patents.” Judge Bryson wrote:

[I]t is clear that Allergan’s motivation for the assignment was to attempt to avoid the IPR proceedings that are currently pending in the PTO by invoking the Tribe’s sovereign immunity as a bar to those proceedings. The Court has serious concerns about the legitimacy of the tactic that Allergan and the Tribe have employed. The essence of the matter is this: Allergan purports to have sold the patents to the Tribe, but in reality it has paid the Tribe to allow Allergan to purchase—or perhaps more precisely, to rent—the Tribe’s sovereign immunity in order to defeat the pending IPR proceedings in the PTO. This is not a situation in which the patentee was entitled to sovereign immunity in the first instance. Rather, Allergan, which does not enjoy sovereign immunity, has invoked the benefits of the patent system and has obtained valuable patent protection for its product, Restasis.

But when faced with the possibility that the PTO would determine that those patents should not have been issued, Allergan has sought to prevent the PTO from reconsidering its original issuance decision. What Allergan seeks is the right to continue to enjoy the considerable benefits of the U.S. patent system without accepting the limits that Congress has placed on those benefits through the administrative mechanism for canceling invalid patents.

If that ploy succeeds, any patentee facing IPR proceedings would presumably be able to defeat those proceedings by employing the same artifice. In short, Allergan’s tactic, if successful, could spell the end of the PTO’s IPR program, which was a central component of the America Invents Act of 2011. In its brief, Allergan is conspicuously silent about the broader consequences of the course it has chosen, but it does not suggest that there is anything unusual about its situation that would make Allergan’s tactic “a restricted railroad ticket, good for this day and train only.” Smith v. Allwright, 321 U.S. 649, 669 (1944) (Roberts, J., dissenting).

Although sovereign immunity has been tempered over the years by statute and court decisions, it survives because there are sound reasons that sovereigns should be protected from at least some kinds of lawsuits. But sovereign immunity should not be treated as a monetizable commodity that can be purchased by private entities as part of a scheme to evade their legal responsibilities. It is not an inexhaustible asset that can be sold to any party that might find it convenient to purchase immunity from suit. Because that is in essence is what the agreement between Allergan and the Tribe does, the Court has serious reservations about whether the contract between Allergan and the Tribe should be recognized as valid, rather than being held void as being contrary to public policy. See generally Restatement of the Law (Second) Contracts §§ 178-179, 186.

Judge Bryson compared the Allergan-Tribe deal to sham transactions found in certain tax situations:

The defendants point out that the assignment-and-licensing transaction in this case is similar in some respects to other transactions that have been held ineffective, such as abusive tax shelter transactions, in which courts have looked behind the face of the transactions to determine whether the transactions have economic substance or are simply a method of gaming the tax system to generate benefits that were not intended to be available. See, e.g., Salem Fin., Inc. v. United States, 786 F.3d 932 (Fed. Cir. 2015); Coltec Indus., Inc. v. United States, 454 F.3d 1340 (Fed. Cir. 2006).

Allergan argues that the transactions are legitimate because the Tribe has offered consideration in the form of its agreement not to waive its sovereign immunity before the PTO and in exchange has received much-needed revenue from Allergan. But such circumstances are frequently encountered in sham transactions, such as abusive tax shelters. The straw parties who perform the service of making the transaction appear to have economic substance, when it actually does not, are providing a service, for which they are ordinarily well compensated. Nonetheless, the transaction is disregarded if it is contrary to the policies underlying the relevant laws.

And Judge Bryson found that this was not the first time a tribe had essentially tried to sell its sovereign immunity:

Another roughly analogous example cited by the defendants is People ex rel. Owen v. Miami Nation Enterprises, 386 P.3d 357 (Cal. 2016). In that case, two tribal entities ran payday loan businesses. When the lending entities were sued by the State for improper lending practices, the entities asserted sovereign immunity. The California Supreme Court determined that, despite the formal agreements between the lending entities and the tribes, the tribes had no operational control over the businesses and received only a small percentage of the profits of the businesses. After examining all of the circumstances, the court concluded that the arrangement between the lenders and the Tribes was such that the businesses were not entitled to assert the tribes’ sovereign immunity.

According to Judge Bryson,

The concern of the courts in both of those examples is the same: whether the party invoking a particular legal protection has engaged in a bona fide transaction of the sort for which that legal protection was intended. In both the abusive tax shelter cases and the Owen case, the answer was no. In this case, as indicated, the Court has serious doubts that the transaction in which Allergan has sought to obtain immunity from inter partes review by the PTO in exchange for payments to the Tribe is the kind of transaction to which the Tribe’s sovereign immunity was meant to extend.

In the end, Judge Bryson added the Tribe as a co-plaintiff, “while leaving the question of the validity of the assignment to be decided in the IPR proceedings, where it is directly presented” to ensure that “any judgment in this case will not be subject to challenge based on the omission of a necessary party[.]” (Judge Bryson had invalidated the patents that were subject to the Allergen-Tribe deal.) “Importantly, the Court’s decision to permit joinder of the Tribe does not constitute a ruling on the validity of the assignment of the Restasis patents or the Tribe’s status as a ‘patentee’ for purposes of the Patent Act, 35 U.S.C. § 281. Instead, it is merely a discretionary determination by the trial court that the transferee’s presence would facilitate the conduct of the litigation.”

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