When Patents are Sovereigns: The Competitive Harms of Leasing Tribal Immunity
abstract. Under the Hatch-Waxman and America Invents Acts, Congress has established a system for judicial and administrative review of prescription-drug patents that balances exclusive rights for patent holders and the entry of generic competitors. Threatening this balance, the pharmaceutical company Allergan recently transferred prescription drug patents to the Saint Regis Mohawk Tribe, a federally recognized Indian tribe. Because tribal sovereign immunity limits the jurisdiction of courts and other adjudicatory bodies to hear cases involving tribal interests, such actions by brand-name pharmaceutical companies may prevent generic companies and other parties from invalidating patents, likely leading to higher drug prices.
This Essay proposes an option to discourage such transactions: an antitrust suit, which would not require the joinder of all co-conspirators and could thereby sidestep sovereign immunity. The Allergan-Tribe transaction improperly increases the probability that Allergan’s patent is upheld beyond what was envisioned by Congress’s original grant of market power. To evaluate such transactions, this Essay argues that courts should adopt the permissive “no economic sense” test: when an agreement makes no economic sense but for its anticompetitive purpose, patent assignments to a sovereign actor are anticompetitive. This test would prevent the naked lease of sovereign immunity such as the present Allergan-Tribe transaction, while still allowing for productive collaborations between private parties, and sovereign states or tribes. The Essay concludes, however, that antitrust law alone cannot address all misuses of sovereign immunity for private gain; Congress must also take a broader approach to address the lack of tribal economic opportunities.
On September 8, 2017, the global pharmaceutical company Allergan announced that it had transferred its patents for its top-selling drug Restasis, a prescription drug for chronic dry eye, to the Saint Regis Mohawk Tribe, a federally recognized Indian tribe.1 In its press release, Allergan referenced both pending patent litigation in the federal courts and ongoing inter partes review (IPR) proceedings2 at the Patent Trial and Appeal Board (PTAB), claiming that the Tribe would not invoke its sovereign immunity in the former, but would file a motion to dismiss in the latter.3 Under the terms of the agreement, the Tribe received $13.75 million upon execution and $15 million in annual royalties in exchange for holding the patents and granting an exclusive license to Allergan.4
This announcement led to immediate outcry5 and drew the ire of members of Congress.6 Missouri Senator Claire McCaskill has drafted a bill to limit tribal sovereign immunity before the PTAB.7 The district court judge in the ongoing patent litigation asked if the transaction was a “sham,”8 and at least one scholar of patent law has argued that—since Allergan retains de facto control of the patents—Allergan should be regarded as the legal owner.9 Underpinning these critiques is the worry that Allergan’s “sale-leaseback” will allow the company to maintain a dominant market position to the detriment of competitors and consumers.
These concerns are well-founded. In the short term, such a transfer could allow Allergan to avoid invalidation of its patents through the PTAB’s IPR process, thereby increasing the probabilistic value of its patents beyond what was envisioned by the initial grant of exclusivity. In the long term, this transaction undermines the viability of the IPR system itself, blunting a congressionally created tool to invalidate weak patents. Furthermore, even though the Tribe did not invoke sovereign immunity in litigation at the trial court level, others following Allergan’s lead might choose to do so, potentially insulating patents from review even in the judicial system. Ultimately, if upheld, these kinds of transactions make it more likely that brand-name firms maintain their market exclusivity, leading to higher drug prices and harming consumers.
In Allergan’s case, the district court ruled that the Restasis patents were invalid,10 and, on February 23, 2018, the PTAB denied the Tribe’s motion to dismiss IPR proceedings on grounds of sovereign immunity.11 However, this debate is far from over. The district court decision on the patents’ validity is on appeal to the Federal Circuit,12 and Allergan and the Tribe are likely to pursue an appeal of the PTAB’s decision, which has already been criticized as potentially outside of the PTAB’s statutory authority.13
Fortunately, while the novelty and complexity of this case have created much uncertainty, there is another means for redress—one that does not require us to enter the quagmire of sovereign immunity: a cause of action for anticompetitive conduct. This Essay argues that Allergan’s actions should be subject to antitrust scrutiny, and that Allergan may be vulnerable to a suit for treble damages because of its conduct. This approach may be preferable to addressing the agreement on other grounds, as it deters the relevant conduct without having to confront thorny questions about the applicability of tribal sovereign immunity in the IPR context. More importantly, it directly disciplines the conduct that is most objectionable to commentators: unduly increasing the probabilistic value of patents.
In Part I, we show how the specter of tribal sovereign immunity raises potential procedural issues with anticompetitive implications and discuss what is at stake for consumers when Allergan licenses its patents to a tribe. In Part II, we argue that plaintiffs may be able to bypass these procedural concerns by bringing an antitrust suit to challenge the sale agreement. Such a suit would not require the plaintiffs to join all co-conspirators, thereby sidestepping sovereign immunity. In Part III, using the Supreme Court’s decision in FTC v. Actavis, Inc.,14 we argue that antitrust laws apply when companies deliberately avoid a statutory framework that regulates competition. We then demonstrate that, when an agreement makes no economic sense but for its anticompetitive purpose, patent assignments to a sovereign actor are anticompetitive. We argue that this “no economic sense” test is an appropriate tool for evaluating such patent assignments since it does not unduly burden procompetitive patent transfers. Finally, in Part IV, we situate this issue in the context of broader pressures that animate the “leasing” of tribal sovereign immunity and highlight the limits of antitrust law to fully address scenarios in which unscrupulous businesses wield tribal sovereign immunity as a weapon.
I. anticompetitive harms
In this Part, we use the Allergan transaction to outline anticompetitive harms that arise when pharmaceutical companies use tribal sovereignty to avoid patent challenges. In this case, Allergan has made clear that it aims to restrict patent challenges through the Tribe’s sovereign immunity.15 In the pharmaceutical patent context, this implicates two patent review processes: Hatch-Waxman challenges and IPR. These two patent review processes promote competition by facilitating the introduction of generic competitors, leading to lower prices for consumers. However, Allergan’s use of tribal sovereign immunity to subvert these processes artificially inflates the probabilistic value of their patents, leading to anticompetitive harms.
A. The Importance of Patent Challenge Processes
This Section provides background on the statutory framework for patent challenges in the pharmaceutical industry. It focuses on two review processes: the Hatch-Waxman patent invalidation process, a pharmaceutical-industry-specific process at the federal court level; and IPR at the PTAB, which applies to patents in general. Because these processes provide avenues for generic drug companies to contest the patents held by other pharmaceutical companies, they help promote competition and lower pharmaceutical prices.
Under the Hatch-Waxman Act,16 generic companies seeking to compete against patented pharmaceutical drugs can file an Abbreviated New Drug Application (ANDA) that shows therapeutic equivalence to the branded drug. This process allows the generic company to avoid duplicative and costly clinical trials. When submitting its application, a generic company can also file a Paragraph IV certification with the U.S. Food and Drug Administration (FDA). This certification states that, to the best of the company’s knowledge, its generic product does not infringe upon any valid patents.17 The branded pharmaceutical company may then choose to sue for patent infringement, creating an opportunity for the generic company to challenge the patents’ validity during the litigation. If the brand-name manufacturer files suit, the FDA cannot approve the generic drug for thirty months unless the court determines the patent is invalid or not infringed before that time elapses.18
Under the IPR process, as formulated in the 2011 Leahy-Smith America Invents Act (AIA),19 any third party can petition for review of a patent on the grounds that it does not meet the requirements for patentability under 35 U.S.C. § 102 (requiring novelty) and § 103 (requiring non-obviousness).20 Only petitions with a “reasonable likelihood” of success are permitted to proceed.21 Once a party petitions the U.S. Patent and Trademark Office (PTO) for IPR, the PTAB determines the validity of the patent after adjudicatory proceedings and hearings.
The IPR process benefits competition by voiding the market power created by invalid patents, and has several advantages over the Hatch-Waxman patent invalidation process. First, IPR provides a cheaper alternative to the typical patent invalidation process through Hatch-Waxman, which leads to costly litigation. One estimate suggests that IPR costs are one-tenth the costs of patent litigation.22 Second, IPR resolves patent validity more quickly, providing disposition of the claim before possible appeals to the Federal Circuit. The AIA sets specific timelines for response by the parties that lead to final decisions in less than two years.23 According to the PTO’s annual performance report, the office has succeeded in meeting these statutory deadlines.24 Third, IPR is more likely to be aligned with the public interest than Hatch-Waxman litigation. While any third party can challenge a patent under the IPR process, Hatch-Waxman lawsuits are brought by drug companies competing in the same market, which opens the possibility of collusion.25
In the pharmaceutical context, the benefits of adjudicating patents do not just accrue to competitors, but can also directly affect prices for consumers. If patents are invalidated before the end of their statutory term, generic drugs may enter the market.26 Prices then drop dramatically, as average pharmaceutical treatment costs can decline by up to 84% after generic entry.27 Spurred by competition, prices for branded drugs can also decrease. For example, the price for a month’s supply of a branded cholesterol drug decreased from more than $150 to $7 in less than a year after generic entry.28 Over the last decade, generic competition has generated nearly $1 trillion in savings for consumers.29 Accordingly, even a short delay in generic entry can be costly for consumers. One study estimated that delays ranging from twenty-one to thirty-three months in the introduction of generics for three drugs cost Medicaid more than $1.5 billion over five years.30
In sum, Hatch-Waxman and IPR have facilitated the introduction of pharmaceutical competition by encouraging patent challenges. Hatch-Waxman provides a streamlined process for patent notifications and challenges, allowing generic drug competitors to enter the market by filing ANDAs and to invalidate weak patents in federal court. IPR further encourages generic competition because it provides another avenue of patent invalidation with lower costs and shorter timelines. IPR is also more likely to be aligned with the public interest. Both these processes have accordingly increased the competitiveness of the pharmaceutical market, benefiting consumers.
B. The Threat of Leasing Tribal Sovereign Immunity
The interaction between tribal sovereign immunity and patent law can lead to anticompetitive harms. In this Section, we start by canvassing the implications of sovereign immunity and the problems potential plaintiffs face when attempting to join a sovereign tribe in the patent context. The Section concludes by discussing the implications of pharmaceutical companies using tribal sovereign immunity to avoid the Hatch-Waxman and IPR processes.
Through the agreement with the Saint Regis Mohawk Tribe, Allergan seeks to take advantage of tribal sovereign immunity. This immunity protects federally recognized tribes from being sued in state and federal courts, and applies to all activity conducted by a tribe, including off-reservation commercial activity.31 The immunity can be waived only in two narrow circumstances: (1) “where Congress has authorized the suit” or (2) where “the tribe has waived its immunity.”32 By invoking tribal sovereign immunity, a pharmaceutical company like Allergan could dismiss a lawsuit in federal court and may remain immune even against counterclaims that the patents are invalid.33 Moreover, Allergan sought to avoid the IPR process entirely by transferring ownership of the patents to the Tribe, which has since moved to dismiss IPR proceedings on sovereign immunity grounds. The Tribe moved to dismiss IPR proceedings on this basis.34 Though the PTAB has denied this motion, this decision is likely to be appealed.35
In federal courts, potential plaintiffs often face problems joining tribes. Although the district court recently found Allergan’s Restasis patents invalid for non-obviousness in Allergan v. Teva,36 a Hatch-Waxman lawsuit initiated by generic companies, key questions still remain about whether it would be feasible for generic challengers to bring a federal lawsuit in other contexts. In Allergan v. Teva, the patent challenge was initiated prior to Allergan’s ownership transfer for the Restasis patents, and the Tribe chose not to invoke its sovereign immunity during the suit. The court therefore simply joined the Tribe as co-plaintiffs under Federal Rule of Civil Procedure (FRCP) 25(c)—but in doing so, the district court questioned whether the original patent transfer was valid at all, noting that the court joined the Tribe as a co-plaintiff only to ensure that the court’s judgment remains valid if the patent assignment to the Tribe is later upheld.37 Allergan and the Tribe have recently jointly appealed the patent invalidity judgment to the Federal Circuit, although they have yet to invoke sovereign immunity.38
While this most recent iteration of the battle has offered consumers and generic companies a respite, a key question remains unresolved: what would have happened if the tribe had invoked its tribal sovereign immunity in federal court? Although Judge Bryson’s district court opinion noted that tribal 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 responsibility,”39 future parties in suits against tribes will still have to face this challenge. Tribal sovereign immunity has been used in other contexts, such as payday lending, to shield companies from liability.40 Moreover, a number of patent-holding entities (known colloquially as “patent trolls” for their practice of extracting rents by accumulating patents and claiming infringement) have partnered with tribes to sue major tech companies such as Amazon, Apple, and Microsoft for patent infringement.41 In the words of one industry insider, “[t]here are dozens and dozens of tribes talking to law firms about this structure.”42
Accordingly, it is important to understand the procedural limitations plaintiffs face when attempting to join sovereign tribes in federal court. Generally, FRCP 19 requires plaintiffs to join all relevant parties who have an important stake in the lawsuit.43 If patent assignments such as Allergan’s are valid, and a tribe’s interests are implicated, a lawsuit seeking declaratory judgment on patent invalidity would likely be dismissed entirely, given the weight courts grant to tribal sovereign immunity. As noted by the D.C. Circuit, when dismissal of a suit is required by tribal immunity, the court is not simply confronted with “some procedural defect . . . . Rather, the dismissal turns on the fact that society has consciously opted to shield Indian tribes from suit without congressional or tribal consent.”44
In light of several recent cases that have acknowledged IPR immunity for the states, the Saint Regis Mohawk Tribe’s sovereign immunity theoretically could have also extended to IPR proceedings.45 In September 2017, the Tribe moved to use sovereign immunity as a shield during the IPR review process and dismiss IPR proceedings.46 If this strategy had succeeded, it would have funneled all patent challenges to Restasis towards the federal court system. As Judge Bryson stated in Allergan’s district court litigation in Allergan v. Teva, “Allergan’s tactic, if successful, could spell the end of the PTO’s IPR program.”47
However, in the most recent development of this case, a three-member PTAB panel denied the Tribe’s ability to invoke sovereign immunity in IPR proceedings.48 In so holding, the panel recognized that whether and in what circumstances tribal sovereign immunity applies in IPR proceedings remains unclear, because there is no controlling precedent or statute that addresses the question.49 The panel further recognized that tribal sovereign immunity is not necessarily analogous to state immunity,50 and that patent laws, including those involving IPR proceedings, are generally applicable laws that apply to tribes.51 The PTAB further suggested that, because the PTAB adjudicates the validity of patents and does not require the participation of patent owners, it does not exercise personal jurisdiction over the tribe.52
Further, the panel concluded in the alternative that the proceedings could continue without the Tribe’s participation. In making this pronouncement, it first held that Allergan was the “true owner of the challenged patents” because the license between Allergan and the Tribe transferred “all substantial rights” back to Allergan.53 The panel then decided that the Tribe was not an indispensable party because Allergan and the Tribe had the same interest in defending the patent.54
Despite this recent decision, however, the applicability of tribal sovereign immunity to IPR proceedings remains an open legal question. As the PTAB admits, there is no controlling legal authority on point. Moreover, the general counsel for the Tribe has already mentioned that the Tribe is considering an appeal. Thus, even though the PTAB has rejected the Tribe’s motion to dismiss IPR proceedings, it may not be the end of the story. The Federal Circuit and eventually the Supreme Court may review the question of when states and tribes have sovereign immunity before the PTAB.
Despite these uncertainties, it is clear that by prolonging and perhaps avoiding the Hatch-Waxman and IPR processes, companies with branded drug products have the potential to delay the entry of generics and reduce the number of generic competitors.55 By wielding sovereign immunity to dismiss patent challenges by generic competitors, Allergan may eliminate the possibility of patent invalidation through IPR and therefore increase the probability of maintaining its exclusive rights.56 If these IPR challenges would have otherwise led the PTAB to invalidate the patents, Allergan’s tactics may lead to a delay in the release of generic drugs, reducing competition and inflating consumer prices for longer periods of time.
Moreover, if this practice becomes commonplace, generic companies may be less likely to compete ex ante, because the litigation costs for challenging even weak patents would significantly increase. Even if tribal immunity is only successfully exercised in PTAB proceedings, generic companies whose expected benefit of challenging the IP falls between the costs of PTAB proceedings and full litigation would no longer have an incentive to dispute the patents. This outcome would undermine the specific incentives that the AIA IPR process is meant to create: a more streamlined, easier way of challenging patents without going through full litigation.
Allergan’s actions—and others that may follow—therefore have the potential to harm competition and consumers by significantly reducing the number of patent adjudications.
II. procedural options: sidestepping tribal immunity in an antitrust suit
As explained in Section I.B, FRCP 19 may be an impediment to more conventional patent invalidation measures, since plaintiffs must join the Tribe in order to proceed in federal court.57 While potential future plaintiffs may face significant trouble in the general patent litigation context, however, they may not have to join the Tribe in an antitrust suit in order to proceed.
Antitrust suits may avoid this procedural hurdle because the Sherman Act allows consumers to recoup treble damages without implicating the interests of the Tribe.58 As explained below, by pursuing a Sherman Act suit, plaintiffs can proceed without joining the Tribe as long as they seek damages from Allergan, rather than an injunction against the enforcement of the agreement. A suit for damages under Section 2 of the Sherman Act59 would not injure the financial interests of the Tribe, as the suit would not invalidate the contract itself but rather would claim consumer damages payable by the drug company.60
Whether a co-conspirator is a required party would be judged under the dual factors of FRCP 19(a)(1), which require courts to assess relief from the points of view of both (1) the plaintiff and (2) the absent party.61 From the plaintiffs’ point of view, courts have generally held that absent co-conspirators are not required parties under FRCP 19(a)(1)(A) because “[a]ntitrust conspirators are liable for the acts of their co[-]conspirators”62 and plaintiffs can recover full damages from a single conspirator.
The analysis from the point of view of the absent party under FRCP 19(a)(1)(B) similarly favors plaintiffs. Under FRCP 19(a)(1)(B), the court must address how the interests of the absent party “might be impaired if an action were resolved in its absence.”63 Only “legally protected” interests qualify for protection, although what interests are sufficient can vary by jurisdiction.64 Key to the present situation, however, is that when courts deal with contractual interests, they pay particular attention to whether the current party can adequately protect the Tribe’s interests in the litigation.65 Unlike in instances where the parties’ interests are in tension, Allergan’s goal is to uphold the contract as a valid transfer of IP rights. These interests align directly with the Tribe’s contractual and financial interests. Plaintiffs can therefore make a colorable showing that the Tribe’s interests are adequately protected by Allergan, and proceed with an antitrust suit as described below.
III. determining antitrust liability
Without setting out the specifics of an antitrust case against Allergan,66 this Part argues that antitrust law plays an especially important role when Congress has provided a statutory framework articulating a vision for appropriate competition. We then set out a framework for evaluating Allergan’s conduct, and argue that courts should ask whether the agreement makes any economic sense but for its anticompetitive purpose (i.e., the “no economic sense” test) as a way to distinguish between legitimate and anticompetitive uses of sovereign immunity.
A. Statutes with a “Procompetitive Thrust”
Although the Sherman Act imposes liability for anticompetitive conduct, general antitrust laws do not operate in isolation. Congress also creates competitive frameworks through more specific pieces of legislation. While the Supreme Court has in certain circumstances recognized that avoiding these Congressional frameworks can have anticompetitive effects that violate the Sherman Act,67 it has not spoken directly to this question.
Based on the Court’s recent decisions, we propose that when Congress creates a competitive framework through legislation defining the terms of competition, actions that nullify that framework can violate the antitrust laws. Courts have long recognized the role antitrust law plays in ensuring the proper functioning of the patent system. Certain exercises of patent rights can rise to the level of abuse and violate antitrust law. For example, attempting to enforce a patent that has been procured by knowing and willful fraud can subject the patent holder to antitrust liability.68 In the present case, Congress has spoken to the issue of how generic drugs should reach the market through the Hatch-Waxman Act and has regulated challenges to the validity of patents through the AIA. Allergan, however, is using tribal sovereign immunity to avoid IPR, and similar contractual arrangements might also be used to avoid the process for suits laid out in Hatch-Waxman. Using tribal sovereign immunity to avoid these statutory frameworks may qualify as an attempt to monopolize under Section 2 of the Sherman Act.69
This argument is a natural extension of the Court’s FTC v. Actavis, Inc. decision confronting the interaction of antitrust law and intellectual property law in a different pharmaceutical context: reverse payment settlements.70 Reverse payment settlements result when firms with patented drugs conspire with generic rivals to forestall generic competition. In these cases, brand firms often provide the generic firm some payment to stay out of the market for a period of time. In Actavis, the Supreme Court resolved the longstanding confusion about whether antitrust law can apply to these types of settlement agreements, which some had argued were insulated from antitrust scrutiny.71 Justice Breyer, writing on behalf of five members of the Court, held that antitrust scrutiny applied to reverse payments.72
In determining antitrust liability for reverse payments, courts are not required to adjudicate patent validity, but can use the agreement itself as a proxy for patent strength. In analyzing the settlement in Actavis, the Court noted that “an unexplained large reverse payment itself” indicated that “the patentee had serious doubts about the patent’s survival.”73 This doubt suggests that the reverse payment is intended to protect weak IP and “maintain supracompetitive prices to be shared among the patentee and the challenger.”74 The Court’s language suggests that arrangements to protect weak or invalid IP are suspect because they create and maintain market power that would not otherwise exist.
This broad principle can be applied to tribal immunity protections for patents. In the Actavis scenario, the patent holder could at least claim that part of the payment was to compensate for the benefit of settling the lawsuit. However, in this context, Allergan receives no economic benefit beyond tribal immunity from selling the patents, suggesting that the arrangement was purely anticompetitive. Because this arrangement has no other plausible explanation beyond the benefits accrued through tribal immunity, any payment by Allergan should trigger the presumption that the transaction is intended to protect weak IP and maintain market power.75
The Court’s decision in Actavis also implicitly recognized that Congress often creates frameworks for competitive conduct that balance different policy goals, such as innovation and antitrust liability. In Actavis, the Court recognized that, although intellectual property law fosters innovation by rewarding creators with exclusive rights in their products, Congress can limit this framework. Accordingly, patents cannot provide a safe harbor from antitrust law.76 This lesson is particularly important when patent law creates a clear framework for competition. The Actavis Court noted that Hatch-Waxman’s “general procompetitive thrust” could not support a statutory policy that exempted reverse settlement payments from antitrust scrutiny.77 This analysis suggests that Hatch-Waxman and other statutes are the mechanisms by which Congress may actualize the particular competition policy implicit in patent law. Avoiding these mechanisms can therefore have anticompetitive implications, and courts have recognized that misuse of the patent system can give rise to antitrust liability.78
The AIA is one such statute that implicates a vision of competition, because it creates a specific form of patent challenge that Allergan’s contract seeks to evade. The AIA allows third parties to challenge patents through the IPR system, and it limits the number and scope of statutory exclusive rights by making it easier and cheaper for generic companies to invalidate patents. Because Allergan avoids this process, its conduct has the “potential for genuine adverse effects on competition.”79
Though the AIA, Hatch-Waxman, and other patent laws provide a backdrop for competition and may appear similar to laws that put agencies in the role of policing competition dynamics, the patent context is ultimately distinct from other regulatory realms. In non-patent regulatory contexts, courts have been skeptical of antitrust claims. For example, in Verizon Communications v. Law Offices of Curtis V. Trinko,80 the plaintiffs argued that the Telecommunications Act of 1996,81 which required Verizon and other local exchange carriers to share their networks with competitors,82 created a new duty for incumbents that could be enforced through antitrust law. Justice Scalia, writing for a divided Court, concluded that antitrust law did not provide a remedy, even though the company violated a statutory scheme intended to create competition.83 The Court noted that the statutory scheme included a savings clause, which did not create new liabilities.84 Moreover, the Telecommunications Act was enforced by the Federal Communications Commission, which provided a remedy to Verizon’s conduct. Similarly, in NYNEX v. Discon, the Supreme Court refused to apply a rule of per se illegality to cases of “regulatory fraud” in which companies colluded to deceive a regulator and raise consumer prices.85 In that case, even though the behavior may have been improper, the Court viewed the behavior as the exercise of market power by a lawful monopolist, rather than as an action that harmed the competitive process.86 A defender of the Allergan transaction might argue that bypassing IPR is analogous to these regulatory cases.
The present situation, however, is distinct from the regulatory context presented in cases such as Trinko and Discon. First, the AIA does not include a savings clause and does not provide any agency remedies for Allergan’s conduct beyond the IPR process itself. These differences are significant. Without a savings clause, Trinko’s limitations on the creation of new antitrust liability would not apply.87 In addition, the private right to challenge patents through IPR indicates that the AIA is a broader law regulating patent rights, rather than a delegation of power to an agency to regulate an industry. In such a situation, antitrust remedies can play an important role in addressing anticompetitive behavior.88 Second, Allergan’s conduct is distinguishable from the defendants’ in these two cases. In Trinko, Verizon simply refused to comply with the statute and thus incurred penalties. However, both in this case and in Actavis, pharmaceutical companies used the market power they gained through patents to subvert the statutory scheme regulating competition. Further, this is not a case of agency deception or fraud that allowed a lawful monopolist to exercise its market power, as in Discon; here, Allergan is expanding the probabilistic value of its patent beyond what Congress had initially envisioned.
By avoiding patent challenges, Allergan increases the probability its patents are not held invalid. When the patent system is subverted, antitrust laws are a necessary backstop to protect competition.89
B. The “No Economic Sense” Test: Distinguishing Between Legitimate and Anticompetitive Uses of Immunity
In this Section, we argue that Allergan’s conduct has no procompetitive justifications because it fails even the permissive “no economic sense” test, which provides a suitable basis to distinguish between procompetitive and anticompetitive uses of sovereign immunity.
Our IP system recognizes that innovation is a collaborative process.90 Many transactions that incidentally invoke sovereign immunity do not raise antitrust concerns because they create new expertise or solve otherwise intractable problems. These legitimate patent assignments may lead to public benefits. However, exclusionary conduct that is disguised as a procompetitive patent assignment can be extremely harmful. In the present context, Allergan’s patent assignment entrenches its dominant position in two ways: (1) it distorts the probabilistic value of its patents by making them harder to challenge through IPR and court processes; and (2) it may further raise rivals’ costs by preventing a determination of invalidity.
The “no economic sense” test, sometimes known as the “economic sham” test, asks whether the conduct as a whole, over time, makes economic sense but for its tendency to eliminate or lessen competition.91 Such a test imposes a theoretical limiting principle on how far antitrust condemnation should apply.92 The test is one of many other general standards that have been proposed for assessing whether conduct is anticompetitive under Section 2.93 As shown below, since Allergan’s behavior makes no economic sense but for its anticompetitive purpose, its conduct carries no procompetitive benefit that can allow it to survive any other economic tests used in antitrust, such as the proportionality test proposed by Areeda and Hovenkamp94 or the consumer welfare test developed by Salop.95
Allergan’s conduct fails under even the most permissive standard of the “no economic sense” test, because the company would not have assigned its patents to the Tribe if doing so did not insulate the Restasis patents from PTAB challenges. Allergan’s CEO, Brent Saunders, openly stated that Allergan transferred its patents to the Tribe to protect itself from the “parallel and often inconsistently adjudicated challenges before both federal courts and the [PTAB].”96 Such statements of intent are relevant “to the extent they help us understand the likely effect of the monopolist’s conduct.”97 Moreover, Allergan’s patent assignment cannot be justified by any procompetitive benefits, such as settling lawsuits (as in the reverse-payment case) or solving a free rider or externality problem (as in the case where inventors assign patents to their employers as a condition of employment). Rather, the arrangement was devised solely to address what Allergan perceived to be a problem with congressionally-created IPR proceedings. In fact, a Texas law firm approached the Saint Regis Mohawk Tribe independently about the possibility of expanding the tribe’s revenue stream, and the law firm only then proposed the arrangement to Allergan.98 Based on these facts, the accompanying exclusionary harms from assigning the patent are not justifiable.
The “no economic sense” test framework is particularly appropriate in the sovereign immunity context, because it provides a sensible limiting principle on how far antitrust condemnation may reach. While other economic tests are available, when important interests like tribal sovereign immunity are also at stake, the “no economic sense” test captures the most egregious behaviors without unduly burdening the sovereign interests of states and tribes. The test allows recent IPR cases recognizing state sovereign immunity to remain intact,99 illustrating how the test captures anticompetitive uses of sovereign immunity without over-inclusively condemning procompetitive behavior.
For example, in NeoChord Inc. v. University of Maryland, the PTAB attempted to bring IPR proceedings against heart valve-related patents owned by the University of Maryland, Baltimore (UMB), which were exclusively licensed to a private entity, Harpoon Medical.100 The PTAB granted UMB’s motion to dismiss, agreeing that the University was immune from suit under the Eleventh Amendment.101 The PTAB further noted that the University was an indispensable party because, although UMB had licensed the patents to a third party, UMB retained substantial rights in the patents themselves. However, the circumstances in Neochord differ greatly from Allergan’s assignment. First, at the time the parties entered into the agreement, it was unclear whether sovereign immunity could be raised in IPR proceedings at all.102 Second, as a company that makes heart valve repair devices, Harpoon was a natural partner for the heart valve patents at issue.103 Instead of simply holding onto the patents as the Saint Regis Mohawk Tribe was asked to do, Harpoon bargained for the exclusive license in order to use it. Therefore, even without potential insulation from an IPR challenge, UMB and Harpoon Medical likely had economic incentives to enter into the transaction—and, unlike Allergan, would pass the “no economic sense” test.
Allergan was therefore incorrect to rely on cases such as Neochord as a way to recuse itself from the IPR process,104 since the parties in NeoChord did not sign the relevant agreement solely to escape IPR review. To the contrary, the present arrangement between Allergan and the St. Regis Mohawk would not have occurred absent the intended effect on IPR proceedings. Courts adopting the “no economic sense” test can thus condemn harmful assignments like Allergan’s without condemning procompetitive ownership transfers.
Further, the “no economic sense” test would not be so overly broad as to condemn procompetitive joint ownership agreements. For example, the PTAB dealt with sovereign immunity in the context of a jointly owned patent in July 2017, in Reactive Surfaces Ltd. v. Toyota Motor Corporation.105 In that case, Toyota and the Regents of the University of Minnesota (UM) jointly owned the patent at issue.106 The PTAB ultimately found that the IPR proceeding could continue without participation from UM even if UM had invoked its Eleventh Amendment sovereign immunity, because Toyota could adequately represent UM’s interests.107 Even if Toyota’s and UM’s interests were at odds, however, the “no economic sense” test proposed here would not condemn the joint ownership. Although the PTAB’s reasoning did not rely on the “no economic sense” test, the PTAB’s decision is consistent with our proposed framework. Specifically, the inventors assigned interests to UM and to Toyota independently.108 Half of the six inventors were research associates or professors at UM; the remaining inventors were research scientists at Toyota.109 Toyota did not seek out UM for use of its sovereign immunity, but gained co-ownership because its assignors collaborated with UM researchers to develop the patent. Thus, there were economic reasons beyond sovereign immunity for the collaboration.
Ultimately, antitrust law is especially important when firms attempt to blunt a tool for generic competition. Since competitors and third parties are legally entitled to invalidate patents through the IPR process, Allergan’s conduct is particularly egregious. Our proposed “no economic sense” framework provides a way to evaluate Allergan’s conduct without being so overbroad as to chill legitimate, procompetitive patent transfers or joint ownership agreements with sovereign entities. Nevertheless, as explained in Part IV, antitrust laws are insufficient on their own to provide a solution to “leases” of tribal sovereign immunity.
IV. addressing leases of tribal immunity in their broader context
This Part places the Allergan deal in broader context, considering both how our proposed antitrust framework might apply to areas of law and how the persistent underdevelopment of Native American communities gives rise to this phenomenon.
Although we are optimistic that antitrust law affords an opening to address Allergan’s conduct, we recognize that antitrust liability will not be able to bypass all company “leases” of tribal sovereign immunity. Although potential litigants may be able to hold Allergan accountable under the IP-antitrust intersection recognized in Actavis, this intervention is context-dependent and may not be available where Congress has not articulated a statutory theory of competition. Therefore, while our proposed theory of antitrust liability provides a shield for competition in areas with IP or quasi-IP protection like the pharmaceutical industry, competition in other industries is more vulnerable. For example, many payday lenders have used tribal sovereign immunity to avoid liability under state laws and regulations.110 Although there is some regulation of payday lending, Congress has not heavily regulated competition in this industry, and there is no obvious statutory scheme to support an antitrust claim.
Thinking about tribal sovereign immunity in isolation invites a game of whack-a-mole, in which law only addresses the symptoms of the systemic problems facing Indian tribes, rather than the actual causes. Though far from monolithic, Native Americans as a whole face among the highest poverty, unemployment, and incarceration rates of any group in the country.111 Moreover, given the difficulties tribes face in raising revenue to provide social services for their members, it is perhaps inevitable that many have resorted to leasing their sovereign immunity.112 Though the question of how to provide adequate economic security for tribes is beyond the scope of this particular Essay, any solutions to this problem should not unduly punish the tribes for seeking to raise revenue for their members. The political complexities involved in abrogating tribal sovereign immunity thus caution against extreme solutions by courts and administrative bodies, such as the PTAB’s absolute rejection of tribal sovereign immunity in IPR proceedings, and towards adopting an antitrust solution instead.
Indeed, these leases for sovereign immunity already carry risks for tribes, as Congress may strip Indian tribes of their immunity in response, thereby depriving them of both a source of revenue and legal protections.113 Moreover, commentators have recognized that “improvident use of tribal sovereign immunity” may invite backlash, leading to diminished decisional independence and legal rights.114 Corporate leases of tribal sovereign immunity have their roots not in a legal puzzle, but in the economic needs of many Indian tribes. Until Congress provides tribes the economic opportunities required to sustain themselves and serve their constituents, any solution to this problem is only half-best.115
The law has so far failed to conclusively address the misappropriation of tribal sovereign immunity to serve private interests. As we have argued, Allergan’s most recent arrangement is likely vulnerable to an antitrust suit because it evades two statutory frameworks for competition: the Hatch-Waxman Act and the Leahy-Smith America Invents Act. To deter future contracts that hurt consumer welfare, we recommend that courts apply the “no economic sense” test, which has been proposed in other antitrust contexts. This test is likely to capture instances where companies contract purely to garner the benefits of sovereign immunity, but avoids condemning “false positives” or legitimate economic arrangements that have procompetitive benefits.
Given the balance between tribal sovereignty and accessibility to generic pharmaceutical products, antitrust law has a particularly important role to play when other regulatory instruments fail. We must continue to search for flexibility in our available toolkit when firms seek to opt out of competition. Otherwise, in arrangements like Allergan’s, only the monopolist wins—tribes are only given a temporary fix that does not address their underlying interests in self-governance, and consumers are left out of the equation entirely.
Cecilia (Yixi) Cheng and Theodore T. Lee are members of the Yale Law School J.D. Class of 2018. The authors contributed equally to the conception and execution of this work. Special thanks to Greg Buzzard, Jamie Durling, Aaron Kesselheim, Doug Melamed, and Fiona Scott Morton for insightful comments and conversations. Thanks also to Allison Douglis, Meenu Krishnan, and Arjun Ramamurti of the Yale Law Journal for their invaluable editorial suggestions. All errors are our own.
Preferred Citation: Cecilia (Yixi) Cheng & Theodore T. Lee, When Patents Are Sovereigns: The Competitive Harms of Leasing Tribal Immunity, 127 Yale L.J. F. 848 (2018), http://www.yalelawjournal.org/forum/when-patents-are-sovereigns.