Research v. Fed. Trade Comm'n

• Decision Date: 30 May 2014
• Docket Number: Civil Case No. 13-1974 (BAH)
• Parties: PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, Plaintiff, v. FEDERAL TRADE COMMISSION, Defendant.
• Court: U.S. District Court — District of Columbia

PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, Plaintiff, v. FEDERAL TRADE COMMISSION, Defendant.

Civil Case No. 13-1974 (BAH)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

Date: May 30, 2014

Judge Beryl A. Howell

MEMORANDUM OPINION

The plaintiff, Pharmaceutical Research and Manufacturers of America ("PhRMA"), a trade association which "represents the country's leading biopharmaceutical researchers and biotechnology companies," see Compl. ¶¶ 9-10, ECF No. 1, seeks to set aside a Final Rule issued by the Federal Trade Commission ("FTC") that requires the pharmaceutical industry to report certain transfers of exclusive patent rights under Section 7A of the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), 15 U.S.C. § 18a; Premerger Notification; Reporting and Waiting Period Requirements, 78 Fed. Reg. 68,705 (Nov. 15, 2013) ("Final Rule"); Jt. App. ("JA") at 7-15, ECF No. 19.¹ PhRMA challenges the Final Rule as violative of the Administrative Procedures Act ("APA"), 5 U.S.C. § 706, because the FTC: (1) lacked statutory authority to issue an industry-specific rule rather than a rule of general application; (2) failed to establish a rational basis for such an industry-specific rule; and (3) failed to comply with legally required procedures. See Compl. ¶¶ 89-106. Pending before the Court are the parties' cross motions for summary judgment. See Pl.'s Mot. Summ. J. ("Pl.'s Mot."), ECF No. 13; Def.'sMot. Summ. J. ("Def.'s Mot."), ECF No. 15. For the reasons explained below, PhRMA's motion is denied and the FTC's motion is granted.²

I. BACKGROUND

The Final Rule states, and PhRMA does not dispute, that "the granting of an exclusive right to commercially use a patent or part of a patent is a potentially reportable asset acquisition under the [HSR] Act." 78 Fed. Reg. at 68,706; JA at 8. The gravamen of PhRMA's complaint is that the Final Rule imposes "fundamental changes to the HSR Act pre-merger notification requirements that would, for the first time in the Act's 37-year history, single out and burden one industry alone with additional notification requirements for patent license transactions previously not regarded by the antitrust agencies as potentially anticompetitive enough to warrant any pre-closing review whatsoever." Pl.'s Mem. Pts & Authorities Supp. Mot. Summ. J. ("Pl.'s Mem.") at 5, ECF No. 13. According to PhRMA, this "selective coverage," id, exceeds the FTC's statutory authority "to relieve certain classes of persons or transactions" from notification requirements and "[i]nstead, the Rule imposes new burdens selectively on a targeted class of persons (i.e., those in the pharmaceutical industry only) in connection with patent license transactions suddenly now regarded by the agency as likely anticompetitive," id. at 17 (emphasis in original). Specifically, the Final Rule addresses two types of transfers of exclusive patent rights that the FTC observed occurred frequently, if not exclusively, in the pharmaceutical industry, prompting the agency to limit application of the Rule to this 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 apatent to make, use, and sell, with retention by the licensor of co-rights, in whole or part ("retained co-rights"). 78 Fed. Reg. at 68,707-08; JA at 9-10.

PhRMA contends that the "selective coverage" of the Final Rule exceeds the FTC's authority under the plain terms of the HSR Act and, furthermore, even if the statute were found to be ambiguous, the agency's "interpretation of its authority is completely at odds with congressional intent," Pl.'s Reply Supp. Mot. Summ. J. & Opp'n FTC's Cross-Mot. Summ. J. ("Pl.'s Reply") at 1, ECF No. 17, such that the Final Rule "is entitled to no deference, and [] should be vacated," id. at 18. The FTC disputes PhRMA's view that the meaning of the HSR Act is plain, positing instead that the statute is silent regarding whether "Congress intended to prohibit the Commission from issuing industry-specific coverage rules." Def.'s Mem. Pts. & Authorities Supp. Mot. Summ. J. & Opp'n Pl.'s Mot. Summ. J. ("Def.'s Mem.") at 11, ECF No. 15. The FTC further contends that the Final Rule is an appropriate exercise of its authority to define terms used in the Act "as necessary and appropriate to carry out the purposes of" the statute. Id. at 14.

To aid in resolution of this dispute over statutory interpretation, the Court begins with an overview of the HSR Act, before turning to a discussion of the challenged rule and procedural history of the instant case.

A. Statutory and Regulatory Framework

Enacted in 1976, the HSR Act was intended to assist enforcement agencies in determining whether an anticipated merger or acquisition was likely to violate federal antitrust laws. See S. REP. No. 94-803, at 1 (1976); H. R. REP. NO. 94-1373, at 5 (1976), reprinted in 1976 U.S.C.C.A.N. 2637, 1976 WL 13988; Mattox v. FTC, 752 F.2d 116, 119-20 (5th Cir.1985) (finding that the HSR Act "was designed to allow review of mergers before they were completed" to determine, pre-consummation, whether such mergers violated antitrust laws). To this end, Section 7A of the HSR Act, codified in 15 U.S.C. § 18a, requires the transferring parties to report to the FTC and the Assistant Attorney General at the U.S. Department of Justice any anticipated transfers of assets when the transferred asset and/or the transferring parties meet certain minimum size requirements specified in the Act.³ The Act "reflects a congressional judgment that divestiture and other post-acquisition remedies were difficult, expensive and sometimes futile," and that safeguards were therefore necessary to evaluate anticipated mergers before they occurred. Mattox, 752 F.2d at 119.

Section 7A of the HSR Act provides that, when planned acquisitions meet statutorily defined minimum size requirements, "[e]xcept as exempted pursuant to subsection (c) of this section, no person shall acquire, directly or indirectly, any voting securities or assets of any other person, unless both persons . . . file notification pursuant to rules under subsection (d)(1) of this section and the waiting period described in subsection (b)(1) of this section has expired." See 15 U.S.C. § 18a(a); see also An Act to Improve and Facilitate the Expeditious and Effective Enforcement of the Antitrust Laws, And For Other Purposes, Pub. L. No. 94-435 tit. II, § 7A(a) (1976).⁴ Subsection (c) of the Act exempts altogether certain classes of transactions from thereporting requirement in subsection (a). 15 U.S.C. § 18a(c). In addition to eleven categories of statutorily defined exempt transactions, subsection (c) also authorizes the FTC to exempt from premerger notification "such other acquisitions, transfers, or transactions" that otherwise meet the minimum size requirements. See id. § 18a(c)(12).

The FTC's broad exemption authority is also repeated in subsection (d), which provides for the exercise of rulemaking and exemption authorities at issue in the instant suit. Specifically, subsection (d)(1) authorizes the FTC to promulgate rules to implement the Act, stating that the FTC "shall require that the notification required under subsection (a) of this section be in such form and contain such documentary material and information relevant to a proposed acquisition as is necessary and appropriate to enable the Federal Trade Commission and the Assistant Attorney General to determine whether such acquisition may, if consummated, violate the antitrust laws[.]" 15 U.S.C. § 18a(d)(1). Subsection (d)(2) grants the FTC authority to "define the terms used in this section" and "prescribe such other rules as may be necessary andappropriate to carry out the purposes of this section." Id. § 18a(d)(2)(A), (C). Finally, subsection (d)(2)(B) authorizes the FTC to "exempt, from the requirements of this section, classes of persons, acquisitions, transfers, or transactions which are not likely to violate the antitrust laws[.]" Id. § 18a(d)(2)(B).⁵ Pursuant to the rulemaking authority granted by subsection 18a(d), the FTC has promulgated rules codified in 16 C.F.R. §§ 801-03. The Final Rule challenged in this action amended the regulation at 16 C.F.R. § 801.2.

In sum, three provision in the HSR Act, subsections (a), (c), and (d), expressly authorize the FTC to exempt certain "classes of persons, acquisitions, transfers, or transactions" from the requisite reporting, even if the transfer of assets meets the minimum size requirements under subsection (a).

B. Challenged FTC Rule

In order to clarify the meaning of an acquiring or acquired person, used in section (a) of the HSR Act, 15 U.S.C. § 18a(a), the Final Rule adds a new paragraph (g) to 16 C.F.R. § 801.2, which sets out the criteria for transfers that are reportable under the HSR Act. 78 Fed. Reg. at 68,712-13; JA at 14-15. This new paragraph (g) clarifies that the "[t]ransfers of patent rights within NAICS Industry Group 3254⁶ [i.e., the pharmaceutical industry] . . . constitutes an asset acquisition . . . if and only if all commercially significant rights to a patent . . . for anytherapeutic area (or specific indication within a therapeutic area) are transferred to another entity. All commercially significant rights are transferred even if the patent holder retains limited manufacturing rights . . . or co-rights . . . ." 78 Fed. Reg. at 68,713; JA at 15. The Final Rule also adds and defines three new terms: "[a]ll commercially significant rights,"⁷ "[l]imited manufacturing rights,"⁸ and "co-rights"⁹ to 16 C.F.R. § 801.1, which contains HSR Act definitions, 78 Fed. Reg. at 68,712-13; JA at 14-15. The rulemaking process underlying the adoption of the Final Rule is described below.

1. Notice of Proposed Rulemaking

On August 20, 2012, the FTC issued a Notice of Proposed Rulemaking ("NPRM") to clarify when "the transfer of...