Allergan’s attempt to extend Restasis patents via deal with Indian tribe doesn’t pass the “straight-face” test; move may meet the letter of the law but violates its spirit.

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The News:

Allergan PLC (Dublin) will transfer to the Saint Regis Mohawk Tribe Council (Akwesasne NY) rights to its blockbuster Restasis dry-eye treatment, says Business Insider. The drugmaker said on Friday (September 8, 2016) the curious deal is meant to protect it from patent challenges.

The tribe, which claims to have sovereign immunity from such challenges, will receive a one-time payment of $13.75 million and annual royalties of around $15 million under the arrangement proposed by the St. Regis Tribe Council, Allergan said in a statement.

Sales of Restasis, which totaled over $1.5 billion last year, account for about 15% of Allergan’s profits, according to AllianceBernstein.

Allergan said it entered into the deal after reviewing recent case law showing it was harder to challenge patents held by certain entities. These include a February ruling by the US Patent and Trademark Office’s trial and appeal board that patents owned by the University of Florida could not be challenged by Medtronic PLC’s Covidien unit because the university enjoyed sovereign immunity.

A different panel of patent and trial appeal board judges reached a similar conclusion in May in a dispute over patents owned by the University of Maryland. Those rulings will be appealed the US Court of Appeals for the Federal Circuit.

Allergan said the patent agreement had no impact on litigation involving applications for generic versions of Restasis which recently went to trial in Federal District Court in Marshall, Texas.

According to the Allergan, the six transferred patents are due to expire in August 2024.

Steve’s Take:

Times are tough if you’re a pharma company with a product that brings in $1.5 billion in annual sales or a little less than 10% of your gross. You’re making money hand over fist on the med but competitors want to get in on the action and introduce cheaper, generic rivals. You’re being challenged in court, racking up legal expenses, facing possible major hits to sales. Isn’t there a way to keep the cash register ringing indefinitely?

Enter the lawyers; in this case, a Texas firm named Shore Chan DePumpo that Fortune says approached the St. Regis Tribe about the possibility of expanding its revenue stream through the patent-housing gambit, and the groups then went to Allergan to propose the arrangement.

Allergan’s in-house chief counsel Bob Bailey and his legal team concluded that the idea had merit. The concept of an intellectual property restructuring using another legal entity as a shield seemed a plausible answer. It was a straight transfer of the Allergan Restasis patents to the St. Regis tribe to take advantage of its sovereign Indian Nation status. Problem of staving off those pesky IP challenges: Solved.

Bailey said the St. Regis tribe, which is receiving $13.75 million in upfront cash from Allergan under the deal, can move to dismiss any patent office disputes “based on their sovereign immunity from IPR challenges,” according to Fortune.

Allergan CEO Saunders said it’s a win for all parties–including the Native American tribe, whose annual budget would be significantly bolstered under the deal.

“These people have real, unmet needs,” Saunders said.

Okay, Mr. Saunders. We all agree with you that Native Americans have “real, unmet needs.” But that’s really not the point to all this IP maneuvering, restructuring and patent dancing, I’m afraid.

Out of law school, my first job was in the rulings division of the IRS national office in DC. Our job was to determine whether certain past or proposed transactions met the requirements of the particular portions of the statute, regulations, court rulings, etc., for which we were responsible. The US patent and trademark office more or less operates the same way as we did.

A lot of scholarly research has been conducted over the years about the nuances between the spirit of a particular law versus the letter in determining culpability. In a nutshell, the letter of the law is its literal meaning. The spirit of the law is its perceived intention. Many jurists believe that violating the spirit of the law accounts for culpability, above and beyond breaking the mere letter of it. In other words, one can incur culpability even when the letter of the law is not technically broken.

Steve's Take: @Allergan's patent transfer to St. Regis tribe evades the spirit of #patent laws Click To Tweet

Allergan’s transfer of its Restasis patents to the St. Regis tribe in order to preserve and extend its exclusivity to sell it is an obvious attempt to evade the spirit of the patent laws and, in my opinion, would not pass the “straight-face” test if and when the transaction comes before the patent office and/or a judicial tribunal.

I have to admit I smiled when I read Allergan CEO Brent Saunders’ assertion that, “We’re not trying to artificially extend these patents, were just trying to protect our property against a system that exposes us to double jeopardy.” Give me a break, please.

Recent rulings by the patent office’s trial and appeals board holding that patents owned by the University of Florida and the University of Maryland could not be challenged because the institutions enjoyed “sovereign immunity.”

The St. Regis tribe on the other hand, unlike the two aforementioned universities, doesn’t conduct scientific research and development in the field of new medicines, doesn’t collaborate with the pharmaceutical industry in new drug discovery, nor does it have any of its own drug patents.

If the Allergan maneuver isn’t a violation of the spirit of the patent laws, I don’t know what is. And remember, it was Allergan and Pfizer’s lawyers who came up with the idea of the tax-ducking move of their headquarters from the US to Ireland a few years ago. The proposed merger of the two companies fell apart, however, but the tax maneuver to Dublin in Allergan’s case stuck.

Bottom Line:

Long term, I believe Congress will have to face the fact that the cost of medicines today presents a national health issue we haven’t had to face before when viewed against our fundamental ability to provide access to them for all citizens. It’s a completely different situation compared with the cost of medicines when their initial discovery and development first brought them within the purview of the patent laws decades ago.

In other words, “pharmaceuticals” needs to be addressed as a separate category of “inventions” covered by the existing patent statute and governed by new rules that comport with our national health resources. A cost “watchdog” like NICE in the UK would be incorporated into this new statutory framework.

Yes, my position flies in the face of a free-market economy, where maximizing profit in every industry rules the day. And the pharmaceutical industry’s lobbying power over Congress is second to none, so this won’t be an easy transition.

But there’s a simple reason why the US spends far more on healthcare than any other “rich” nation. It’s due to the massively disproportionate amount of our total health spending on pharmaceuticals. And there’s ample research and data that makes this quite clear.

What do we do? I believe Pharma’s halcyon days with its endless patent-dancing dodges and new legal artifices are numbered here in the US. We can’t afford it, the public is tired of it, and our legislators know deep down something needs to be done.

We just need to keep the pressure on.