Federal Appeals Court Upholds FTC HSR Rule on Pharma Patent Licenses

Background – the HSR Act

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act), acquisitions of voting securities, assets and other commercial interests which exceed certain monetary thresholds must be reported to the Federal Trade Commission (FTC) and Department of Justice Antitrust Division (DOJ). The HSR Act imposes a waiting period on the closing of these transactions. The waiting period enables FTC and DOJ to conduct an antitrust review of a notified transaction, and either agency can investigate and block transactions that may substantially lessen competition.

The Old Rule

Since the HSR Act was enacted in 1976, the FTC has viewed an exclusive patent license to be an asset, the acquisition of which may be subject to pre-closing notification and review. Deciding whether a patent license was “exclusive” depended on whether the licensee acquired the right to “make, use and sell” products using the patent (or part of the patent) to the exclusion of all others, including the licensor. The FTC adopted a longstanding interpretation that a patent license was not exclusive, and therefore not subject to the HSR Act reporting and waiting requirements, if the licensor retained the right to manufacture products – even if the license permitted the licensor to manufacture products solely for the licensee.

The New Rule

In November 2013, the FTC proposed a new rule that expanded the definition of “exclusive” pharmaceutical patent licenses. Under the new rule, a pharmaceutical patent license is exclusive if it transfers “all commercially significant rights” to the patent (or part of the patent) to the licensee, defined to mean that only the recipient of the exclusive license may use the patent in a particular therapeutic area (or for a specific indication within a therapeutic area). The key distinction between the old rule and new rule is that “all commercially significant rights” may be transferred even if the licensor retains limited rights to manufacture products for the licensee. The FTC explained the rule “is focused on exclusive patent licenses that transfer all rights to a patent or part of a patent but where the licensor retains rights to manufacture solely for the licensee.” The FTC further stated that in its experience “the pharmaceutical industry is the only industry in which parties regularly enter into exclusive patent licenses that transfer all commercially significant rights.” For this reason, the FTC made the new rule applicable only to exclusive pharmaceutical patent licenses. This was the first time in the history of the HSR Act that FTC singled out a particular industry for unique treatment under the premerger notification rules.

The PhRMA Lawsuit & Defeat

In December of 2013, shortly before the rule became effective, the Pharmaceutical Research and Manufacturers of America (PhRMA) brought suit against the FTC in the District of Columbia arguing that the agency lacked authority under the HSR Act to promulgate industry specific rules, and also claiming the agency’s reasoning behind the rule was arbitrary and capricious. The District Court Judge Beryl A. Howell upheld the rule and awarded summary judgment to the FTC, deciding that the agency was due deference in its interpretation of the HSR Act.

On appeal to the D.C. Circuit, the circuit panel affirmed the lower court opinion and sided with the FTC. The Court found the agency’s interpretation of the HSR Act to be permissible, noting that the plain language of the statute did not prohibit industry specific rules. Senior Circuit Judge Harry T. Edwards stated, “The rule is obviously consistent with the purpose of the [HSR 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.” The Court also rejected PhRMA’s arbitrary and capricious argument, finding that the FTC did not rely on factors which Congress did not intend for it to consider. Judge Edwards added, “the FTC’s explanation for its promulgation of the rule is perfectly reasonable and supported by the record.” 

After the decision, the Director of the Bureau of Competition at the FTC, Debbie Feinstein, issued the following statement: “The rulemaking is an important part of our efforts to protect competition in the pharmaceutical sector, and I am pleased that the appeals court has affirmed it.”

Conclusion

While it remains an oddity that the pharmaceutical industry was targeted in such a specific way, going forward, pharmaceutical and biopharmaceutical firms have no choice but to determine whether the transfer of any patent licenses should be notified under the HSR Act prior to closing. Failure to properly notify the license transfer could lead to civil liability and penalties of up to $16,000 per day. Please contact any member of the Goodwin Procter Antitrust Group for further information.