Senators seek probe of Allergan’s patent sale to Mohawk Tribe; could Tesla do the same with its battery patents?

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The News:

Four senators are demanding an investigation of Allergan PLC’s (Dublin IRL) first-of-a-kind patent deal with the Saint Regis Mohawk Tribe, alleging the move to protect Restasis is another example of pharma “putting profits before patients.”

In a letter to Senate Judiciary Committee Chairman Sen. Chuck Grassley (R-IA) and Ranking Member Sen. Dianne Feinstein (D-CA), Democratic Sens. Maggie Hassan of New Hampshire, Bob Casey of Pennsylvania, Sherrod Brown of Ohio and Richard Blumenthal of Connecticut called Allergan’s deal “blatantly anti-competitive.” They’re urging the committee leaders to probe the deal’s implications for competition and drug costs.

Allergan signed its licensing agreement with the St. Regis Mohawk Tribe last month, agreeing to transfer Restasis patents and license them back for $13.75 million up front and up to $15 million per year, FiercePharma reports. Because the tribe is a sovereign nation, it can claim immunity from a type of patent challenge called an inter partes review (IPR).

Critics blasted the arrangement, while some industry watchers thought it was genius. St. Regis has since filed a motion to dismiss the patent review. In a statement, an Allergan representative said the senators should focus on the IPR process “and its negative impact on life science innovation” rather than the deal.

“As the Senators are well aware, experts across the legal, biopharmaceutical and business communities have called on Congress to fix the issues inherent within IPR,” an Allergan spokesperson said. “Congress has failed to act to protect innovation, and the matter is now before the US Supreme Court.”

Shortly after signing the deal, Allergan CEO Brent Saunders told FiercePharma the company executed the license so it can focus on a separate Restasis patent dispute in federal court. He likened the current patent challenge landscape to “double jeopardy” under a “flawed” system.

Bloomberg View writer Joe Nocera called the setup “sleazy, sneaky, unscrupulous” and “just plain wrong.” David Mitchell, founder of Patients for Affordable Drugs, urged industry groups PhRMA and BIO to disavow the “legal dodge.”

Many in the industry thought it might become the next pharma controversy after a relatively quiet period. The call for an investigation follows a familiar storyline for pharma controversies that flare up, but generally peter out after a while.

Steve’s Take:

What’s next? Electric automaker and energy storage giant Tesla transfers the patents on its revolutionary batteries to the same Mohawk Tribe as Allergan did with its Restatis drug? Or perhaps another?

As of January 2017, 567 Native American tribes were legally recognized by the Bureau of Indian Affairs (BIA) of the United States. That’s quite a few among which to choose, Mr. Elon Musk (Tesla’s co-founder and chief executive).

Ridiculous? Not so fast.

This whole issue deserves, or should I say, desperately needs, some perspective. The headquarters of the St. Regis Mohawk Tribe, a Native American community in upstate New York, is an unlikely venue for one of the most controversial patent disputes in years, the Financial Times points out. But this innocuous building, located on a bleak strip of highway just a few minutes from the Canadian border, has become the testing ground for a brash new strategy in intellectual property.

Last month, Allergan, the US drugmaker legally headquartered in Dublin, Ireland, transferred patents protecting its lucrative eye drug, Restasis, to the tribe, which subsequently applied to have a challenge against the patents thrown out, arguing it is protected from such claims by sovereign immunity.

If successful, the gambit would close one path used by generic drugmakers, such as Teva Pharmaceuticals, Mylan and Akorn, which are trying to have Allergan’s intellectual property invalidated so they can launch cheaper generic versions of the medicine.

Restasis, a treatment for dry eye, is Allergan’s top-selling drug after its wrinkle injection Botox, generating almost $1.5 billion in sales last year and accounting for about 10% of overall revenues. The arrival of an early generic version of Restasis before its patents expire in 2024 would hurt the company’s bottom line, given the drug accounts for roughly 15% of profits, according to Bernstein.

But the deal with the tribe is likely to have much broader implications, not just for the pharmaceuticals sector–where successful patent challenges can quickly erase billions of dollars of revenue–but also in other industries where intellectual property is hotly contested.

Dale White, general counsel for the St. Regis Mohawk, says the tribe has already taken ownership of patents from SRC Labs, a high-performance computer group, and is in discussions with another technology company, which he declined to name.

The patent switch was not White’s idea, but rather the strategy of Shore Chan DePumpo LLP, a law firm based in Dallas. Michael Shore, managing partner, says he devised the tactic after winning an intellectual property case on behalf of the University of Florida earlier this year. He argued that the state university was a sovereign and therefore had immunity from patent challenges.

The attorney subsequently tried to find other sovereign entities and zeroed in on Native American tribes, which have been protected from such challenges since a 1940 Supreme Court decision.

“We immediately saw the value in sovereigns holding patents . . . so we started planning strategies to reap the value of that arbitrage,” says Mr. Shore. “We approached several tribes with the concept. None understood it until the St. Regis Mohawk Tribe.”

Shore Chan subsequently introduced the tribe to Allergan.

Despite the reputational risk to Allergan, analysts and lawyers predict drugmakers and other companies will follow suit if Allergan’s deal with St. Regis Mohawk helps it fend off patent challenges.

“My expectation is everyone will wait to see what the patent office does in the Allergan case. If it works, we’ll see other people jumping in,” says Ronny Gal, Bernstein analyst, citing AbbVie and Amgen as drugmakers that are facing damaging patent challenges.

Jacob Sherkow, an associate professor at New York Law School, predicts that companies will eventually use similar arrangements to try to protect their medicines not just from the IPR process but also in the courts, which would put generic drugmakers at a major disadvantage.

“There’s not really much generic makers can do other than roll up in the corner in the fetal position or petition Congress to eliminate tribal immunity for patent claims,” Sherkow says.

Bottom Line:

As I’ve written before, 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.

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

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.

Allergan’s transfer of its Restasis patents to the St. Regis Mohawk Tribe to preserve and extend its exclusivity to sell it seems 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.

Allergan is no stranger to tricky legal ploys. Remember, it was Allergan and Pfizer’s lawyers who came up with the idea of the tax-ducking move of their headquarters to Ireland a few years ago. The proposed merger of the two companies fell apart, but the tax maneuver to Dublin in Allergan’s case stuck.

And then there’s the astute Mr. Elon Musk, almost certainly eyeing all these maneuvers, along with the other top execs and law firms in US industry. Tesla’s intellectual property assets appear to cover some pretty valuable technologies, ones which will become even more important to the company as it moves away from vehicle production and towards energy storage solutions.

I can just picture Mr. Musk and his legal army, casually thumbing through the list of 567 Native American tribes, looking for the right one. Or maybe just pick the St. Regis Mohawk. Gambling casinos, pharmaceuticals, high-performance computers, battery technology: Where does it end? The answer could be…it doesn’t.