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From Antitrust Law Daily, June 9, 2015

FTC HSR rule amendments on reporting of patent rights transfers upheld

By Linda O’Brien, J.D., LL.M.

The U.S. Court of Appeals in Washington, D.C. has affirmed a district court ruling that the pharmaceutical industry must comply with the FTC’s recent amendments to the Hart-Scott-Rodino (HSR) Act premerger notification rules regarding the reporting of certain transfers of exclusive patent rights to the federal antitrust agencies for review (Pharmaceutical Research and Manufacturers of America v. FTC, June 9, 2015, Edwards, H.).

In November 2013, the FTC issued HSR amendments that made the granting of an exclusive right to commercially use a patent or part of a patent a potentially reportable asset acquisition under the HSR Act. The rule addressed two types of transfers of exclusive patent rights that the FTC observed occurred frequently, if not exclusively, in the pharmaceutical industry: (1) the transfer of exclusive rights under a patent to use and sell, with retention by the licensor of the right to manufacture (“retained manufacturing rights”); and (2) the transfer of exclusive rights under a patent to make, use, and sell, with retention by the licensor of co-rights, in whole or part (“retained co-rights”).

Pharmaceutical Research and Manufacturers of America (PhRMA), a trade association that represents leading biopharmaceutical researchers and biotechnology companies, filed a challenge to the amendments on the ground that they singled out a particular industry. The district court granted summary judgment for the FTC and PhRMA appealed.

The appellate court found that nothing in the plain meaning, context, or legislative history of the HSR Act unambiguously precluded the FTC from promulgating a rule, the substance of which was within its delegated authority, merely because the rule focuses on a specific industry. The HSR Act fosters government identification of mergers and acquisitions likely to violate federal antitrust laws before the proposed transactions are consummated, the court explained. The statute states in part that “no person shall acquire, directly or indirectly, any . . . assets of any other person, unless both persons file notification . . .”

PhRMA’s argument that the rule was precluded by the plain meaning of the Act or based on an impermissible construction of the Act was rejected as meritless. According to the court, the FTC’s rule was based on a permissible construction of the statute, and consistent with the purpose of the Act, which is to improve the enforcement capabilities of the FTC and Department of Justice. PhRMA did not identify any statutory language that unambiguously limited the FTC’s broad discretion in any way relevant to the case. The court noted that the reference to “no person shall acquire” reasonably could be construed to refer to persons who were not exempt from the filing requirements of the Act and the Commission was not obligated to exempt any industries when it adopted the rule.

Furthermore, the rule was consistent with the purpose of the Act, which was to assist the FTC in enforcing the Clayton Act and provide a tool to identify problematic mergers and acquisitions before they were consummated. Given these purposes, it would have “made no sense for Congress to restrict the FTC from focusing on review of particular types of transactions that the agency determines occur in only one industry,” in the court’s view.

PhRMA’s argument that the FTC’s adoption of the rule was arbitrary and capricious also was rejected. The court agreed with the FTC that it was entitled to deference in its interpretation of the HSR Act’s grant of authority to promulgate industry-specific rules. It was clear that the Commission’s action was taken pursuant to the express delegations of authority and the rule as not “manifestly contrary to the statute.” Moreover, the FTC provided a reasoned basis for its promulgation of the rule. The rule was not arbitrary and capricious because the FTC relied on its expertise, HSR filings, and publicly available data in support of its rulemaking process, the court concluded.

The case is No. 14-5182.

Attorneys: Evan A. Young (Baker Botts, LLP) for Pharmaceutical Research and Manufacturers of America. Michele Arington for the FTC.

Companies: Pharmaceutical Research and Manufacturers of America

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