A federal judge ruled today that patents protecting Allergan's $1.5 billion blockbuster dry-eye drug, Restasis, are invalid due to obviousness. The international drug company's stock dropped about five percent on the news.

The ruling by US Circuit Judge William Bryson could have wide effects on the patent landscape because the Restasis patents are at the center of a novel legal strategy that involves using Native American sovereignty rights to avoid certain types of patent reviews, called inter partes reviews, or IPRs.

Last month, Allergan gave its six Restasis patents to the St. Regis Mohawk Tribe, located in northern New York. The tribe was paid $13.5 million up front and promised $15 million annually as long as the patents were valid. Shortly after the transfer, lawyers representing Allergan and the tribe moved to dismiss an IPR against their patents on the grounds that the patents now enjoyed "sovereign immunity."

Now that Allergan's patents have been thrown out in district court, the company's attempts to dodge IPRs may been rendered moot. But this ruling won't be the last time sovereign immunity is used to defend patents. A patent-holding company has already embraced the same strategy by getting a different tribe's help in holding a patent being used to sue Apple over various iPhone models.

"We are disappointed by the Federal District Court's decision on the RESTASIS patents," Robert Bailey, Chief Legal Officer for Allergan, said in a statement. "We are carefully reviewing the decision and are considering all options."

The district court's decision can be appealed. But Judge Bryson's decision may hold more weight than an average district court decision because he is an appeals court judge who is sitting "by designation" in the Eastern District of Texas. An appeal of this case would go to a panel of Bryson's colleagues on the US Court of Appeals for the Federal Circuit.

Nothing new here

Restasis was approved by the FDA in 2002, three years after Allergan began the drug-approval process. Allergan had an original patent on the formulation, known in the case as the Ding I patent, US Patent No. 5,474,979, which was filed in 1994 and expired in 2014.

In a 135-page opinion (PDF) published today, Judge Bryson found that Allergan's patents on later formulations were obvious in light of the Ding I patent, as well as two other patents known as the Sall patent and the Ding II patent.

A doctor testifying for Allergan claimed that a particular formulation of 0.05% cyclosporin and 1.25% castor oil was particularly effective at treating dry eye. The doctor said "[t]his result was surprising and completely unexpected." That doctor's declaration was instrumental in persuading the US Patent Office to grant applications for additional patents.

But in Judge Bryson's review, the .05% cyclosporin/1.25% castor oil formulation "did not perform significantly better than other formulations known in 2003," when Allergan patented its later formulation, which became Restasis.

The decision will clear the way for the four generic competitors in this litigation to start producing generic versions of Restasis at a much lower cost. At this point, however, no generic equivalent is on the market. The four companies that challenged the Restasis patents include Teva Pharmaceuticals, the world's largest generic drugmaker, as well as Mylan Pharmaceuticals, Apotex, and Akorn.

“Serious concerns”

Before issuing the ruling on the Restasis patents, Bryson insisted that the parties discuss the issue of whether or not Allergan should be allowed to join the St. Regis Mohawk Tribe as a plaintiff to the case, "or whether the assignment of the patents to the Tribe should be disregarded as a sham."

Earlier today, Bryson decided that the St. Regis Mohawk Tribe should be joined to the case. But he didn't add the tribe because he thought the deal was valid—rather, he did it as an insurance policy to make sure that his decision to invalidate the patents couldn't be challenged on the grounds that the wrong parties were named.

But Judge Bryson's opinion (PDF) on the matter makes clear that he does not endorse or validate the deal to essentially purchase sovereign immunity from the St. Regis Tribe.

"The court has serious concerns about the legitimacy of the tactic that Allergan and the Tribe have employed," Bryson writes. In his view, Allergan has paid the Tribe to "rent" its sovereign immunity at the US Patent Office.

He continues:

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... 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.

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 responsibility," the judge concludes.

Allergan has said it sought sovereign immunity for its patents because the IPR process is "flawed and broken." The company promised it would not seek sovereign immunity in district court, however.