United States: Court Affirms FTC's New HSR Rule On Pharmaceutical Patent License Transfers

The D.C. Circuit has rejected a challenge by the Pharmaceutical Research and Manufacturers of America ("PhRMA") to an FTC rule that makes the HSR Act reporting requirements cover pharmaceutical patent licenses that transfer "all commercially significant rights." The rule, adopted in 2013, broadened the HSR Act's notification and waiting requirements to include pharmaceutical patent licenses as potentially reportable transactions even where the licensor retained manufacturing rights. The appeals court affirmed the lower court's decision, noting that the intent of the premerger notification statute is to improve the enforcement capabilities of federal antitrust agencies before transactions are consummated, and holding that the agency's rulemaking is entitled to deference under the Chevron doctrine.

This is the first time that federal antitrust enforcement agencies have imposed affirmative pre-transaction reporting obligations exclusively on a single industry. The D.C. Circuit decision upholds the FTC's broad authority to issue regulations expanding the scope of filing obligations under the HSR Act and including within the scope of such filing obligations certain industry-specific transactions that it considers may potentially affect competition.

The new rule

The HSR Act, together with FTC rules and regulations, establishes notification and waiting period requirements for certain large acquisitions and mergers. The FTC considers an exclusive license to patent rights to be an asset acquisition of patent rights for purposes of the HSR Act, provided that the license is exclusive. In 2013, the FTC clarified that – within the pharmaceutical industry – even if a patent holder retains limited manufacturing rights or co-rights, an exclusive license of patent rights may be a potentially reportable asset acquisition if all commercially significant rights are transferred. Prior to the rule, to be reportable, an exclusive patent license would have to include all rights to make, use, and sell the pharmaceutical product. The new rule expands the reporting requirement to exclusive licenses where a licensor retains the right to manufacture a patented pharmaceutical exclusively for the licensee. The rule applies to exclusive licenses to all fields of use under pharmaceutical patents, as well as exclusive licenses limited to a particular therapeutic area or specific indication within a therapeutic area.

The rulemaking procedures

During the agency's rulemaking procedures, PhRMA argued that the rule improperly burdened a single industry to the exclusion of all others, discriminating specifically against pharmaceutical companies. In response, the FTC indicated that the new rule focused on the pharmaceutical industry because the agency had not found any other industry in which this type of patent license was prevalent. The FTC explained that exclusive distribution agreements were different in than the patent right transfers contemplated by the rule, because distribution agreements merely conveyed the exclusive right to distribute a patented product and did not encompass the acquisition of all of the product's commercially significant rights. However, the FTC made clear that transactions in other industries with a license transfer akin to the transfers contemplated by the rule could also be reportable as asset acquisitions.

In 2013, one month after the rule was finalized, PhRMA filed suit, arguing that the rule exceeded the FTC's authority under the plain terms of the HSR Act, was based on an impermissible interpretation of the HSR Act, and should be overturned under the milestone Administrative Procedure Act ("APA") decision Chevron U.S.A. v. Natural Resources Defense Counsel, Inc. 467 U.S. 837 (1984). PhRMA argued that the agency's adoption of the rule violated the APA's prohibition on "arbitrary and capricious" agency action, focusing on the rule's exclusive applicability only to the pharmaceutical industry. PhRMA did not contend that requiring reporting of these types of license transfers would be inconsistent with the HSR Act or violate the APA if it applied generally.

The district court granted summary judgment in favor of the FTC and against PhRMA, and the D.C. Circuit affirmed that decision.

Chevron deference

The D.C. Circuit analyzed PhRMA's challenge to the rule's exclusive applicability to the pharmaceutical industry within the context of the Chevron doctrine. Under Chevron, a court first must ask whether an agency's rule violates the plain terms of the statute that grants the agency its rulemaking authority. If the statute is ambiguous or Congress did not specifically address the precise question at issue, the court must then ask whether the agency's rule is based on a permissible construction of that statute.

HSR Act gives FTC discretion to designate which entities must report transactions. In this case, the court concluded that the HSR Act delegated authority to the FTC to promulgate rules that targeted specific industries.

The HSR Act requires that a "person" making certain acquisitions comply with the statute, and the Act gives the FTC authority to define terms used in the statute, including "person." The HSR Act also gives the FTC discretion to "exempt ... classes of persons, acquisitions, transfers, or transactions which are not likely to violate the antitrust laws." Taken together, the court found these provisions gave the FTC "great discretion to define statutory terms and to promulgate rules to facilitate Government identification of mergers and acquisitions likely to violate federal antitrust laws before the mergers and acquisitions are consummated." The court noted that nothing in the Act compelled the FTC to issue only rules of general applicability across industries.

The court concluded that the FTC's interpretation of its rulemaking authority did not violate the plain terms of the HSR Act and that the statute indeed gave the FTC discretion to designate which entities must report which transactions.

The agency's rule is based on a permissible construction of the HSR Act. The court also concluded that the FTC's rule was based on a permissible construction of the HSR Act.

On this point, the court found "no doubt" that the FTC's rule was promulgated pursuant to express delegations of authority and therefore concluded the agency was entitled to Chevron deference. Indeed, the court noted that Congress had specifically left blanks in the statute for the agency to fill, giving the agency discretion to define certain terms. Furthermore, the FTC had properly explained why the rule focused on the pharmaceutical industry, noting it was the only industry in which these types of transfers were prevalent.

PhRMA argued that the FTC's construction of its rulemaking authority under the Act was impermissible because the agency had previously rejected implementing rules that exempted certain industries from the premerger notification requirements of the HSR Act. The court found PhRMA's reasoning unpersuasive, noting that the FTC's approach to its exemption authority was separate from its authority to define when an asset acquisition was reportable under the HSR Act. Moreover, even if the FTC's rule represented a sharp break with prior interpretations of the HSR Act, the agency still would be entitled to rulemaking deference under Chevron.

Administrative Procedure Act

PhRMA finally argued that the FTC's rule violated the APA's prohibition on "arbitrary and capricious" agency action. The APA analysis is substantively the same as under Chevron's second prong. The court held that PhRMA's contentions, that the FTC had inadequately explained its reasoning for limiting the rule to the pharmaceutical industry, were without merit, as the agency had explained this in its rulemaking procedures. Moreover, PhRMA did not challenge the FTC's rulemaking authority to promulgate a rule bringing within the HSR Act the acquisition of exclusive rights to a patent that covered all commercially significant rights; it only challenged the rule's covering just the pharmaceutical industry while leaving out similar transactions in other industries, perhaps having similar competitive effects. The court affirmed the lower court's decision, concluding that the FTC's interpretation of the HSR Act was rationally related to the goals of the Act and that its focusing on the pharmaceutical industry was reasonable.

Conclusion

The FTC described the new rule as "is important part of [the FTC's] efforts to protect competition in the pharmaceutical sector." This is the first time that federal antitrust enforcement agencies have imposed affirmative pre-transaction reporting obligations exclusively on a single industry. Going forward, failure to notify federal antitrust authorities of a pharmaceutical's exclusive licensing of a patent, even where the licensor retains manufacturing rights, could lead to civil liability and penalties of up to $16,000 per day.

The case is Pharmaceutical Research and Manufacturers of America v. Federal Trade Commission (No. 1:13-cv-01974), and the D.C. Circuit's June 9, 2015 opinion can be found here.

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