Allergan should have learned from payday lenders: Hiding behind tribal sovereign immunity is not as easy as it looks.
In September, Allergan rocked the IP world by transferring patents to its best-selling eye drug Restasis to the St. Regis Mohawk Tribe. The Tribe paid nothing for Restasis—in fact, Allergan paid the Tribe $13.75 million to take Restasis off its hands. Allergan also agreed to pay the tribe some $15 million annually for the privilege of leasing back rights to the drug it used to own.
Paying to transfer rights to a drug may seem bizarre, but it could be worth several billion dollars to Allergan. The company hopes to use tribal sovereign immunity to shield its patents from challenges by companies hoping to sell generic versions of the drug. The US Patent Trial and Appeal Board, which hears these challenges, recently held that the sovereign immunity of state universities bars challenges to patents they own. Because tribal sovereign immunity generally follows state sovereign immunity, if the deals work, Allergan could extend its monopoly on Restasis—and keep its billion-plus annual revenue—for much longer.
For the St. Regis Mohawk tribe, too, this seems like a no-brainer. Selling sovereign immunity threatens tribal sovereignty in the long term by creating a false impression that tribes are sham sovereigns. But because the St. Regis Mohawk is a real sovereign working to support its citizens, $15 million a year is understandably hard to pass up. The tribe is a lone economic bright spot in an otherwise depressed area on the New York-Canada border. It’s the major employer for tribal citizens, and it struggles to maintain community cohesion across a tightening international border. Intent on diversifying its economic resources, the tribe had already acquired several computer patents earlier this year.
But the fate of similar attempts to use sovereign immunity in payday lending schemes shows the pitfalls of the deal. To escape from state laws that prohibit the sky-high interest rates payday lenders charge, a number of lenders partnered with tribes and for years used sovereign immunity to fend off state regulators. But the success of this strategy has now largely collapsed. New York issued cease-and-desist orders to the off-reservation banks that facilitated the loans. The Consumer Financial Protection Bureau, which as an arm of the United States is not blocked by sovereign immunity, is cracking down as well. Most threatening for Allergan, a jury just found Scott Tucker, the race car driver behind several of these tribal payday lending schemes, guilty of criminal fraud for orchestrating sham tribal partnerships to evade the law.
Criminal prosecutions probably won’t ensue here, but that’s because of the weakest part of the deal. Allergan isn’t even pretending the tribe has anything more than naked ownership. Tribal businesses have sovereign immunity only so long as they are considered “arms of the tribe.” They must not only be owned by the tribe, they must be meaningfully controlled by the tribe. Tribal colleges count. So do tribal casinos. But patent deals where the manufacturer actually pays the tribe for its “ownership” and immediately leases the patents back? Probably not.
Although Sen. Claire McCaskill, D-Mo., has already proposed a bill to abrogate tribal sovereign immunity in such patent actions, it is unlikely to pass. But the scars to the perceptions of tribes will be much more long-standing. And the viability of Allergan’s deal is likely to fall apart long before they fade.
Bethany R. Berger holds the Wallace Stevens Professorship at the University of Connecticut School of Law and is a leading expert on federal Indian law