The drugmaker Allergan announced Friday that it had transferred its patents on a best-selling eye drug to the Saint Regis Mohawk Tribe in upstate New York — an unusual gambit to protect the drug from a patent dispute.Under the deal, which involves the dry-eye drug Restasis, Allergan will pay the tribe $13.75 million. In exchange, the tribe will claim sovereign immunity as grounds to dismiss a patent challenge through a unit of the United States Patent and Trademark Office. The tribe will lease the patents back to Allergan, and will receive $15 million in annual royalties as long as the patents remain valid.
Allergan announced the deal in a press release. This hearkens back to a time when corporations worked with Alaskan Natives to avoid taxes. It became known as the Great Eskimo Tax Scam.
The Great Eskimo Tax Scam grew out of a brief, curious tax loophole that permitted Alaskan companies owned by Eskimos to sell their losses for hard cash to other American corporations. By offsetting the Eskimo losses against their gains, American corporations were able to avoid income taxes. All of a sudden there was a business in matching up profitable American corporations with Eskimos. (Carlyle Group co-founder David) Rubenstein and Norris spotted the window of opportunity and leapt through.
Since no one likes to pay taxes, finding the corporate buyers was easy. The trick was to flush out the loss-making Eskimos. Through a friend in Washington, Rubenstein plugged himself into a group in northern Alaska that had discovered a dubious technique for showing tax losses on idle property. (The Internal Revenue Service now challenges the validity of the Eskimos' accounting.) To persuade the Eskimos to deal with him, Rubenstein flew them to Washington and put them up in a fancy hotel on the condition that they listen to his pitch. In less than a year Rubenstein and Norris shuffled between $1 billion and $2 billion dollars of dubious Eskimo losses into profitable American companies, for which they took a 1 percent fee, or between $10 million and $20 million. "I wouldn't be surprised if they made more on that than they've made on everything else since," says a Carlyle associate. According to Rubenstein, "It gave me and some of the others here the confidence that we could compete in the investment world." Still, he only acknowledges his debt to the business of tax avoidance after the subject has been raised.It took Congress several years to close the Eskimo loophole. How long will it take to close the sovereign immunity loophole for patent protection? The dodge enables drugs to stay on patent, i.e. remain more expensive and hold off cheaper generic versions.
It's been ten years since Congress first attempted to eliminate preferred carried interest taxation for private equity underwriters, like Carlyle. Congress hasn't done it despite overwhelming public support for billionaires to pay the same tax rate as their secretary.
Congress serves their funders. Rarely do they serve the people. I expect the Tribal Patent Protection Scam will live for quite a time.
Update 9-22-17: The tribe filed for dismissal of the patent lawsuit.