Patent abuse is undermining American health care

The pharmaceutical company Allergan shocked the prescription drug market this month when it transferred its intellectual property rights to its blockbuster drug Restasis, a treatment for dry eyes that generated $1.5 billion in sales last year, to the Saint Regis Mohawk Indian Tribe in exchange for an exclusive licensing deal. This bold tactic was intended to avoid patent review panels that a former chief federal patent judge called “death squads” for patents. 

In this never-seen-before move, Allergan is forcing policymakers to take notice of a brewing controversy over how our nation’s medicines are developed, marketed and transitioned to less expensive generics. This cautionary tale is all about unintended consequences from the 2011 enactment of the American Invents Act (AIA). At that time, “patent trolls” were using old, questionable patents to extort money from high-tech companies that independently developed innovative products. Because patent litigation can be expensive, the trolls were able to generate settlements for less than the cost of defending their often specious claims. 

To take away the troll’s leverage, Congress gave the Patent Trial and Appeal Board the authority to invalidate old, poorly constructed patents. This post-patent review process is called inter partes review (IPR). It could be used instead of, or in addition to litigation, and could be filed by anyone and at any time after the Patent & Trademark Office issues a patent. The targets here were dubious high-tech patents that were generally the result of little investment and written to be overly broad. Congress was hoping that, by removing these obstacles, it could achieve the social and economic benefit of facilitating the next generation of technology.

{mosads}Further, IPR’s rules were written to disfavor patent holders, particularly compared to litigation. For example, IPR does not provide a presumption that a patent is valid, which courts do. IPR uses a lower standard of proof than courts for what needs to be shown to invalidate a patent. IPR also interprets the technical aspects of patents differently than courts; they view the terms as broad as possible, thereby making it easier to conclude that a patent is overbroad and, therefore, invalid. Under these rules, the Board has invalidated almost 80 percent of the patents it reviews. By contrast, litigation confirms a patent’s validity about 70 percent of the time. 

Given this success rate, IPR quickly became the hot, new tool for challenging even legitimate patents, including for prescription medicines that can take years and billions of dollars to develop and secure approvals. There are reports of “patent pirates” knowingly using patented technology and threatening IPR challenges if the patent holder asserts its rights. Hedge funds have shorted a company’s stock and filed IPR challenges to their patents to drive down their stock, a problem for small companies whose value is based on a single patent or two. IPR is also used for intra-industry disputes, in addition to litigation. These are unintended consequences. 

Allergan is betting that by selling their Restasis patents to the Saint Regis Mohawk tribe, these patents will become immune to IPR challenges. Under the deal, the tribe will receive a one-time payment of $13.75 million and royalties of about $15 million per year in order to hold the patents and license them exclusively back to Allergan. The legal theory, which is based on a recent Supreme Court ruling, is that the Patent Trial and Appeal Board does not have jurisdiction over sovereign entities, including Indian tribes. This is the first time such a work-around has been tried, so nobody is certain whether it will actually work. 

It is believed the Restasis patents would still be subject to challenge in the courts, but not both litigation and IPR. When announcing the deal, Allergan’s CEO underscored what he believed to be the unfairness of having two, separate forums and rules for invalidating patents, especially where IPR can effectively overturn the patent decisions made in the federal courts. He said Allergan is “completely open to having these patents adjudicated in the federal courts. But we don’t think, going through that, we should be subject to a second review.” 

This issue of double jeopardy is common to all patents, but is particularly controversial for prescription drugs because IPR could undermine the Hatch-Waxman Act. This act, passed in 1984, was a major compromise between branded and generic drug companies that has opened the door to the wide availability of generic drugs. In short, branded drugs companies received certain patent protections, which facilitated research and development of new, potentially life-saving and life-enhancing medicines, and generic drug companies received regulatory shortcuts so that they could get their generics to market faster after a patent’s expiration.

Like all compromises, Hatch-Waxman is not perfect, but it has been largely successful. In 1984, less than 20 percent of the post-patent market was captured by generic drugs. Today, that number is nearly 90 percent. Also, patent litigation and enforcement has become fairly predictable. Courts, unlike IPR panels, are bound by previous rulings and use well-defined legal theories to determine whether a patent is valid. If Hatch-Waxman has shortcomings, which it no doubt does, these issues can be addressed. IPR, though, threatens the entire framework.

The problem is that, rather than facilitate technology developments, IPR can chill advancements in prescription drugs. According to recent reports, it costs $2.6 billion to bring the average drug to market, only 12 percent of patented drugs receive FDA approval, and just 1 in 5 approved drugs cover their R&D costs. These manufacturers have explained that patent predictability is essential for generating investments in new medicines and engaging in beneficial joint endeavors with competitors. Sen. Chuck Schumer (D-N.Y.) said in a 2015 Senate hearing that “no one anticipated” that IPR would turn out to be such “a run-around for Hatch-Waxman.”

Regardless of what one thinks about Allergan’s creative deal with the Saint Regis Mohawk tribe, it is an important conversation starter. What should the role of IPR be? Is IPR subject to too much abuse? How can we balance the needs of both the hi-tech and pharmaceutical industries? Congress, the PTO and the courts should heed Allergan’s clarion call and try to answer these questions. The American health care system depends on it.

Phil Goldberg is the director of the Progressive Policy Institute’s Center for Civil Justice and the office managing partner of the Washington, D.C. office of Shook, Hardy & Bacon.