PhRMAs Objections to HSR Rule on Exclusive Licenses Face Skeptical Appellate Judges

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PhRMAs Objections to HSR Rule on Exclusive Licenses Face Skeptical Appellate Judges

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The Federal Trade Commission's Premerger Notification Office (FTC) has long interpreted Hart-Scott-Rodino (HSR) premerger notification requirements to cover exclusive licenses as a reportable acquisition (assuming all other requirements are met) if the licensor did not retain any rights to "make, use or sell" under the patent. That rule changed in December 2013 — but only for transfers of patent rights within the pharmaceutical industry. Under the new rule, the FTC considers a patent license a reportable acquisition even if the licensor retains the right to manufacture, only if those retained manufacturing rights are solely for the licensee. The FTC's rationale is that, despite the retention of those limited rights, the licensor essentially is transferring "all commercially significant rights" to the patent, and so the license is akin to an acquisition.

The Pharmaceutical Research and Manufacturers of America (PhRMA) objected to this new rule as the FTC was considering it and then sued in early 2014 to block its implementation. In June, it lost on summary judgment. PhRMA appealed, and a DC Circuit panel heard oral arguments on March 24, 2015. If the panel's questions are any indication of its decision, PhRMA will lose again.

HSR requires parties to transactions that cross certain thresholds to file specific information and documents with the antitrust agencies and pay a fee. The highly technical statute and its implementing regulations cover mergers and some joint ventures and asset acquisitions. After filing, the parties must wait for agency approval before closing the transaction. While most transactions are cleared in the initial 30 days, many reviews take months before the agency approves or sues to block the transaction.

PhRMA argued that HSR allows the FTC only to exempt certain industries and transactions from coverage, not to increase the burdens on any specific industry. In its rulemaking and court arguments, the FTC explained that it was not expanding coverage or increasing burdens for anyone, only clarifying which transactions must be notified. To date, the FTC's experience with these types of licenses, and the HSR questions they generate, come solely from the pharmaceutical industry. Yet the FTC claims that "such transactions remain potentially reportable under" existing HSR rules for all industries and the FTC "will continue to assess the appropriateness of a rule for other industries."

At oral argument in its appeal of the FTC's summary judgment victory, PhRMA was sharply questioned by the panel. One judge repeatedly said PhRMA's argument "makes no sense." All three judges pointed to the broad authority the statute gives to the FTC to define HSR terms. The judges were not swayed by PhRMA's assertion that this rule was improper because it was the first HSR rule not applied to all industries: "The fact that something has always been a certain way doesn't mean an agency can't figure out something going forward and do it better. It just doesn’t make any sense."

The panel did ask the FTC why it did not write the new rule to apply to all industries and then just apply it to the pharmaceutical industry. (Schiff Hardin's Steve Cernak made a similar comment here when the rule was finalized.) The FTC responded that a broader rule would only create unnecessary confusion and additional filings. According to the FTC's counsel, "the reasoned decision making that the commission engaged in here has identified a problem" and tailored the rule to solve it.

The panel gave no indication of when it would rule; however, its questions indicated that its ultimate decision is unlikely to give pharmaceutical companies relief from this HSR rule.

Questions regarding HSR compliance should be directed to Steve Cernak or Bill Hannay.