Today, Congressman Jerrold Nadler (NY-10), Ranking Member of the Subcommittee on Courts, Intellectual Property, and the Internet, delivered the following statement at a subcommittee hearing on Sovereign Immunity in Intellectual Property.

Below is Congressman Nadler’s opening statement:

"Mr. Chairman, State sovereign immunity is a well-established concept, enshrined in our Constitution, that generally protects States from being sued in federal courts without their consent.  Similarly, federal law generally extends sovereign immunity to Native American tribes, as well.

"For many years, Congress and the courts have wrestled with numerous questions concerning the appropriate scope and use of sovereign immunity as it pertains to intellectual property.  For example, is it fair that States can protect their IP from infringement by availing themselves of the legal system, yet they can shield themselves from liability by invoking sovereign immunity if they are sued for the same infringing behavior?  What limitations can be placed on sovereign immunity while staying within constitutional boundaries?  And what incentives could we design to encourage States to waive sovereign immunity in IP cases?

"These are all important questions, worthy of careful consideration.  In light of recent events, however, a new set of questions have arisen: Can sovereign immunity be used as a giant loophole for private actors to evade legal scrutiny of their intellectual property, and to exploit for their own commercial purposes?  And, if so, what can Congress do about it?

"These questions arise because of the recent actions by the pharmaceutical company, Allergan, and its cynical ploy to shield its patents on a lucrative drug from review at the U.S. Patent and Trademark Office, by taking advantage of a Native American tribe’s sovereign status.  Rather than subject itself to the PTO’s Inter Partes Review, or IPR, process, Allergan transferred the patents on its highly successful drug, RESTASIS, to the St. Regis Mohawk Native American Tribe, which immediately granted an exclusive license back to Allergan.  Allergan paid the Tribe $13.75 million upfront, as part of the deal, plus it committed to ongoing royalties of $15 million a year.  In exchange, the Tribe needed only to agree that it would invoke its sovereign immunity if the patents were challenged in IPR.

"According to Allergan, it took this step because it believes IPR is deeply flawed, unfair to patent-holders, and disruptive to the balanced process established for generic drug competition under the Hatch-Waxman Act.    Moreover, they argue, their patents could still be reviewed in federal court, just not in IPR.

"It is true that Allergan’s gambit did not shield the patents from federal court review, and in fact, those patents were recently held invalid by a court in the Eastern District of Texas.  However, the Court in that case also made clear that it had 'serious concerns about the legitimacy of the tactic that Allergan and the Tribe have employed.'  This deal has been widely condemned, not just because it is seen as thumbing its nose at the legal system, but also because, if successful, other drug companies could use this scheme to protect expensive brand-name drugs from lower-priced generic competition.

"IPR was created in the 2011 America Invents Act.  It is intended to be a relatively quick and inexpensive way for the PTO to conduct a second look at an issued patent, and to invalidate patents that should never have been issued.  This administrative process occurs separately from, though often concurrently with, federal court consideration of the same patent’s validity.

"The IPR process has many critics—not just Allergan—and many questions have been raised about whether it is functioning as intended.  Some stakeholders have complained that it provides competitors with multiple bites at the apple in challenging a patent’s validity.  Others—rightly in my view—have argued that it is problematic for IPR proceedings to use a different standard for evaluating patent validity from the one that is used in federal courts.  IPR is also criticized by some as being stacked against the patent-holder, and as being too likely to find a patent invalid.

"The IPR process also has many defenders, however.  They argue that the patent system is strengthened by having an efficient system for weeding out invalid patents.  They point out that the stock-in-trade of patent trolls is weak patents that never should have been issued, and they argue that IPR has been invaluable in removing such patents from the market.  They also note that the PTO only institutes an IPR proceeding when there is a reasonable likelihood that the patent is invalid.  Thus, they argue, it is to be expected that, once instituted, a significant percentage of proceedings would result in canceling a patent, and that the statistics should not be read to imply that IPR is unfair to patent-holders.

"The merits of the IPR process should be debated and, if changes are needed, we should consider them in due course.  That is for Congress to decide, with input from relevant stakeholders.  It is unacceptable, however, for private actors, like Allergan, to do an end-run around IPR by making use of a third-party’s sovereign immunity, solely for strategic advantage.  Such behavior makes a mockery of Congressional authority and of the rule of law.

"More worrisome is the precedent this transaction sets.  Already, other companies are rushing to make similar deals, across various industries.  Whatever one thinks of IPR, it is the law of the land, and it is the clear intent of Congress that it be available to anyone who seeks to challenge a patent under its rules.  We should not allow gamesmanship to circumvent Congressional authority.

"I look forward to hearing from our witnesses today their thoughts on the appropriate scope of sovereign immunity in intellectual property, and what we can do to ensure that it is not abused.  I thank the Chairman for holding this important hearing, and I yield back the balance of my time."

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