D.C. Circuit Rules That FTC Can Change HSR Rules Targeted at Pharma Patents

HSR Rule Change

In 2013, a FTC rulemaking deemed that the transfers of pharmaceutical patent rights to be reportable assets under the Hart-Scott-Rodino Act (“HSR”) – even if the sellers retain some manufacturing rights.  Prior to the change, an acquisition of pharmaceutical patent rights was reportable only if all rights to “make, use and sell” the patented technology were transferred; that rule still applies to patent transfer practices in other industries.  The FTC changed the rule with respect to pharmaceutical patents after observing that in recent years pharmaceutical companies had been transferring most of the essential (or “all commercially significant”) rights under an exclusive license, but were able to avoid reporting such transfers under the current approach of the HSR.

Following the FTC’s rulemaking, the Pharmaceutical Research and Manufacturers of America (PhRMA”) challenged in federal court.  In the lower district court, both the FTC and PhRMA moved for summary judgment.  The lower district court ruled in the FTC’s favor.  On appeal, PhRMA argued that the lower court decision should be overturned because the FTC does not have the authority under the HSR to make industry-specific rules and that the FTC’s adoption of the rule was arbitrary and capricious.  However, the D.C. Court of Appeals disagreed.

In its opinion, the D.C. Court of Appeals held that Congress’s intent was not to restrict the agency’s authority under the HSR to broad rules only.  Further, they noted that PhRMA and other industry groups had significant opportunity to participate and comment during the rulemaking period.  According to the D.C. Court of Appeals:

We affirm the judgment of the District Court because none of PhRMA’s claims has merit. Nothing in the plain meaning, context, or legislative history of the Act unambiguously precludes the FTC from promulgating a rule, the substance of which is clearly within its delegated authority, merely because the rule focuses on a specific industry that is the sole source of the problem being addressed. Congress did not address the “precise question at issue” here, but it did “explicitly [leave] a gap [in the statute] for the agency to fill.” Chevron, 467 U.S. at 843. Therefore, the only “question for the court is whether the agency’s answer is based on a permissible construction of the statute.” Id. We answer that question in the affirmative. The Rule is obviously consistent with the purpose of the Act, which is to improve the enforcement capabilities of the FTC and the Department of Justice by facilitating their review of large acquisitions before they are consummated. And the FTC’s explanation for its promulgation of the Rule is perfectly reasonable and supported by the record.

Continuing on, the court found:

We also reject PhRMA’s arguments that the FTC’s adoption of the Rule was arbitrary and capricious. The Commission reasonably explained and supported its position during the rulemaking process, and PhRMA was in no way prejudiced by any alleged lack of opportunity to comment on the proposed rule.

While the D.C. Court of Appeals decision is aimed at the pharmaceutical industry, it leaves other industries wondering whether they must report patent transfers under the newly revised HSR.  The court and the FTC were unequivocal, stating, “If other industries adopted patent transfer practices of the sort found in the pharmaceutical industry, ‘such exclusive patent licenses remain potentially reportable.’”  Thus, while the new rule focuses on the pharmaceutical industry, an identical analysis could be applied to other industries using similar patent transfer practices.  

Pharmaceutical Research and Manufacturers of America