Yesterday, it was announced that Allergan had transferred the ownership of the patents on its billion-dollar drug Restasis, used for the treatment of chronic dry eye, to the Saint Regis Mohawk Tribe. The Tribe then exclusively licensed the drug back to Allergan, in exchange for tens of millions of dollars in both licensing and royalty fees. Although it may not sound like it, this transfer is potentially huge news in the drug pricing world. It is also extremely complex, and its full implications have yet to be determined.

Enormous caveat before we begin: I am by no means an expert on tribal sovereign immunity. I may well be wrong here. (In fact, I would very much like to be wrong here.) There is little (any?) case law on sovereign immunity’s impact in the Hatch-Waxman area, and much of what follows is extrapolated from case law on tribal sovereign immunity both in IP and in other contexts, state sovereign immunity in the IP area, and discussions with other law professors. Please let me know if this is your area of expertise and you believe I’ve gotten the analysis wrong!

In short, if repeated and taken to its logical conclusion, this transfer has the potential to prevent most invalidity challenges to drug patents. Would-be generic competitors could not seek to initiate inter partes review (IPR) actions before the Patent and Trademark Office (PTO). They could not bring declaratory judgment actions in federal court. And – both most importantly and most unclear – they could not bring Paragraph IV invalidity counterclaims under Hatch-Waxman, preventing generic companies from independently challenging patents’ invalidity and potentially requiring us all to wait until the very end of patent expiration to experience generic competition.

Here’s why: tribal sovereign immunity claims will bar these suits. Let’s take them one at a time. First, Allergan’s stated reason for the transfer is to insulate it from the ongoing IPR action against its patents. Allergan does not want to allow the PTO to find its patents to be invalid, and a newly asserted sovereign immunity argument seems likely to allow Allergan to dismiss the IPR. State universities whose patents end up in IPRs have successfully used this argument, and there is no reason to think it would not work here. This is also the reason that declaratory judgment actions of invalidity in federal court will be dismissed. As Professor Mike Carrier states in the New York Times’ coverage of Allergan’s transfer, there are reasons to be concerned about this set of implications. (Some might also remember that BIO and PhRMA have lobbied for legislation that would insulate their patents from IPR challenges. They have been unsuccessful so far, and we might see Allergan’s actions here as one strategy to accomplish what they were otherwise unable to do.)

But it gets worse. Because it seems likely that tribal sovereign immunity would also insulate the tribe from a counterclaim of invalidity as part of a Hatch-Waxman Paragraph IV suit. Recall that the usual posture of a Paragraph IV suit is as follows: a generic drug company has filed a Paragraph IV ANDA alleging that the innovator company’s patents are invalid (for example). The innovator company then sues the generic for patent infringement, as permitted by the statute. The generic drug company may then counterclaim for invalidity. If they succeed in invalidating the innovator company’s patents, then the generic can come to market earlier than anticipated and help bring down drug prices more quickly.

Except that tribal sovereign immunity should insulate an innovator company from that counterclaim for invalidity. This may not be the case for state universities, who have been held to waive sovereign immunity for counterclaims by initiating the infringement suit in the first instance. But in a range of contexts, courts have held or reaffirmed that even tribes initiating lawsuits are immune from counterclaims. And it does not appear (on its face) that Hatch-Waxman has abrogated this sovereign immunity. Allergan has said that the transfer “has no impact on” an ongoing ANDA proceeding for its Restasis patents. But as a matter of law, it is not clear why that would be so. (For more, see Jake Sherkow’s great Tweetstorm here.)

Hatch-Waxman was supposed to function as a compromise between two opposing interest groups. Innovator pharmaceutical companies got patent term restoration, lengthening their remaining patent life for some of the time they lost during the FDA approval process. And generic companies gained a more streamlined path to market and the ability to challenge innovator companies’ patents more easily. This move by Allergan, if repeated, severely damages that right of generic companies. And innovator drug companies don’t get to decide that they want the benefit of Hatch-Waxman without the cost.

Here’s what needs to happen right now:

Allergan needs to explain publicly why its actions do not jeopardize the entire Hatch-Waxman framework, and not merely the entire IPR framework. If, in their view, the patent owner’s choice to initiate a Hatch-Waxman suit functions to waive sovereign immunity for invalidity counterclaims, that would be one thing. But if it’s just that Allergan is right now not actively choosing to undermine Hatch-Waxman, that’s not sufficient. PhRMA should be asked whether Allergan’s conduct is permitted under its membership rules. If so, PhRMA needs to take a hard look – again – at its membership criteria. In May, PhRMA reformed its membership criteria to require members to meet certain standards in terms of R&D investment. This move enabled PhRMA to promote its new innovation-focused PR campaign while also expelling some companies who had engaged in more egregious drug pricing conduct. At the time, I expressed concern that the new membership criteria would not be sufficient to discipline the bad actors within the group. Unfortunately, I was right. Congress should consider calling for an investigation and hearings into Allergan’s activities. Allergan is paying money to the Saint Regis Mohawk Tribe so that it can avoid challenges to its patents that might result in lower-cost drugs being available to American consumers. In a Congress concerned about drug pricing, we might expect some interest here.

It remains to be seen whether Allergan’s move will be successful, or if the courts will look skeptically at the post-FDA approval transfer of rights and aim to avoid its implications. But anyone who cares about drug pricing should be very, very concerned about the potential impact of Allergan’s actions here. I know I’ll be watching the arguments industry makes going forward very closely.

Update 9/10/17: Thank you to all who thoughtfully engaged with the post and sent along your comments! Some patent litigators (most helpfully Steve Horowitz, who you should be following on Twitter if you’re not already) noted that even if my argument regarding counterclaims of invalidity is correct, invalidity can still be raised as an affirmative defense in Hatch-Waxman litigation. This is quite right, and I didn’t mean to suggest otherwise. But as a procedural matter, requiring ANDA filers to assert invalidity as a defense (and precluding them from bringing a counterclaim) tilts the playing field in the innovator company’s favor. The innovator company’s choice of claims to assert (and by extension, to not assert) dictates the contents of that defense in a way it would not control the counterclaim. And if non-infringement is found or the case otherwise dismissed, a defense of invalidity may be dismissed as moot where a counterclaim could not be. Everyone should also go read Professor Sherkow’s tweetstorm from this morning on this question, and whether we might see strategic behavior designed to encourage the generic applicant to launch at risk, in a way that could disadvantage smaller generic entrants.