Hart-Scott-Rodino & Chevron step zero: can the FTC target the pharmaceutical industry?

AuthorLeverington, Tyler

INTRODUCTION I. OPERATION AND AMENDMENT OF THE HART-SCOTT-RODINO ACT A. Origins, Purpose, and Operation of the Hart-Scott Rodino Act B. Exercising New Power Pursuant to the Hart-Scott-Rodino Act II. THE FTC'S AUTHORITY TO REGULATE A SINGLE INDUSTRY A. Searching for Authority to Regulate a Single Industry B. The District Court's Application of Chevron Deference 1. District Court Decision 2. Chevron Deference & Step Zero III. THE EFFECTS OF THE INTERSECTION OF INTELLECTUAL PROPERTY LAW, ANTITRUST LAW, AND ADMINISTRATIVE REGULATION CONCLUSION INTRODUCTION

In 2013, the Federal Trade Commission amended the Premerger Notification Program developed by the Hart-Scott-Rodino Act to "provide a framework for determining when a transaction involving the transfer of rights to a patent or part of a patent in the pharmaceutical [industry] ... is reportable under the Hart Scott Rodino Act." (1) Specifically, the Federal Trade Commission (FTC) amended [section][section] 801.1 and 801.2 of 16 C.F.R. [section] 801 to codify an analysis structure that makes exclusive patent licensing agreements in the pharmaceutical industry reportable asset acquisitions. (2)

Serious questions exist, however, as to whether the FTC has authority under the Hart-Scott-Rodino Act to promulgate rules that only apply to a single industry. Furthermore, the justifications offered by the FTC for its disparate treatment of the pharmaceutical industry have been called into question. The agency's decision to single out the pharmaceutical industry could be deemed arbitrary and capricious in violation of the Administrative Procedure Act, if the disparate treatment is not based on reasonable grounds. A finding that would result in the agency action being erased from the law as it currently exists.

Beyond whether it is legally permissible to single out a single industry under the Hart-Scott-Rodino Act of 1976 (HSR Act), additional policy concerns are associated with the implementation of the new amendments. In a highly competitive industry with constantly changing science, the potential for a transaction to be delayed while awaiting a decision from the FTC, consuming large amounts of time and money is a serious issue that will surely be taken into account when relevant agreements are being contemplated. While little doubt exists that regulation is necessary, regulatory costs can clog the developmental pipelines that allow small drug developers to team with larger entities capable of ensuring new drugs meet their full potential.

With those concerns in mind, the Pharmaceutical Research and Manufacturers of America (PhRMA) filed suit against the FTC in the District of Columbia, challenging the FTC's authority to regulate a single industry, as well as the FTC's compliance with the Administrative Procedure Act (APA). (3) Judge Howell of the District Court for the District of Columbia dismissed the suit on summary judgment pursuant to Federal Rule of Civil Procedure 56 after affording the commission the exceptionally high deferential standard announced in Chevron, U.S.A., Inc. v. NRDC, Inc. (4) PhRMA is currently appealing the decision. While the district court engaged in what is commonly known as the "Chevron two-step," it failed to consider Chevron "step-zero." The Court may have afforded the FTC less deference and undertaken a more stringent examination of the FTC's actions, potentially resulting in different finding, had it considered step zero.

This comment will contemplate whether the District Court in Pharmaceutical Research and Manufacturers of America v. Federal Trade Commission, afforded the FTC proper deference in upholding the agency's actions or if a different standard should have been used. Finally, this comment will consider the effects the amendment might have on the pharmaceutical industry as well as larger questions about the interaction of intellectual property law, antitrust law, and administrative regulation. Ultimately, the outcome of the PhARMA litigation will not only determine the appropriate level of deference afforded the FTC's actions, but will affect tens of thousands of people, if not more. If the recent amendments to the HSR Act stand, compliance costs will increase and the time it takes to get new, life- saving drugs to patients will increase.


    1. Origins, Purpose, and Operation of the Hart-Scott Rodino Act

      The Federal Trade Commission's stated mission is to protect consumers and the American economy from anti-competitive or deceptive practices with potential to harm the competitive process. (5) Outside of its ability to regulate unfair competition practices through [section] 2 of the Federal Trade Commission Act, the FTC's authority to regulate anti-competitive practices is specified in the Clayton Act (6) and the Clayton Act's amendment, the Hart-Scott-Rodino Act of 1976 (HSR Act). (7) Specifically, the Clayton Act provides that "no person ... shall acquire the whole or any part of the assets of another ... where ... the effect of such acquisition may be substantially to lessen competition." (8)

      The HSR Act of 1976 amended the Clayton Act to include section 7A, which granted the FTC authority to preemptively block proposed mergers and acquisitions. (9) The pre-clearance process, known as the "premerger notification program," (10) requires companies participating in a qualifying merger to present the proposed transaction to the FTC before consummation. (11) The FTC has thirty to sixty days to investigate whether the transaction is anticompetitive in a way that violates US law. (12) If a transaction is deemed anticompetitive, the FTC initiates legal action to obtain an injunction that will block consummation of the transaction. (13) Historically, the FTC has analyzed asset acquisitions, by determining reportability of a transaction under a "make, use, and sell" analysis. (14)

      This assessment has also included transfers of patent rights. (15) Under that model, reportability of a transaction turned on whether exclusive rights to make, use, or sell the subject of patent changed hands. (16) Many transactions, however, are now structured to allow the licensor to retain limited manufacturing rights or other "co-rights" to develop, promote, market, or commercialize the product with and for the sole benefit of the licensee. (17) Thus, the transactions evade FTC scrutiny under the make, use, and sell analysis because the licensor in these transactions is not transferring exclusive rights. (18)

      This transaction structure could be viewed as an attempt to take advantage of a loophole, allowing companies to engage in anticompetitive transactions while avoiding FTC review. (19) Reasons exist, however, to believe the new transaction structure serves a more legitimate purpose. As the FTC noted, the Premerger Notification Office frequently sees these transactions when an innovator patents a new drug, but cannot bear the costs of the testing and FDA approval process. (20) For those innovators an exclusive licensing agreement presents an opportunity for a greater financial return via revenue sharing than the innovator could receive from a patent sale. (21)

    2. Exercising New Power Pursuant to the Hart-Scott-Rodino Act

      The HSR Act, grants the FTC authority to define the terms used in the Act (22) or "prescribe such others rules as may be necessary and appropriate to carry out the purposes of [that] section." (23) In 2013, the FTC amended title 16 of the Code of Federal Regulation's [section][section] 801.1 and 801.2. (24)

      The amendment added paragraphs (o), (p), and (q) to [section] 801.1. (25) Those three paragraphs provide key definitions for the terms used in paragraph (g), which applies only to the pharmaceutical industry. (26) The definitions are strategically structured to enable application to the pharmaceutical industry based on assertions made by the FTC during the rulemaking process. (27)

      Paragraph (o), defines "all commercially significant rights," as "the exclusive rights to a patent that allow only the recipient of the exclusive patent rights to use the patent in a particular therapeutic area." (28) Paragraph (p), in turn defines "limited manufacturing rights," as "the rights retained by a patent holder to manufacture the products covered by a patent when all other exclusive rights to the patent within a therapeutic area (or specific indication within a therapeutic area) have been transferred to the recipient of the patent rights." (29) "Co-rights," are then defined to mean "shared rights retained by the patent holder to assist the recipient of the exclusive patent rights in developing and commercializing the product covered by the patent ... [including], but are not limited to, co-development, co-promotion, co-marketing, and co-commercialization." (30)

      Finally, the amendment added paragraph (g) to section 801.2. (31) Paragraph (g)--applicable only to "NAICS Industry Group 33254" (an FTC categorization encompassing the pharmaceutical industry)--then uses those terms in a way that triggers reporting requirements when patent rights are transferred. (32) The most substantive portion of the addition reads:

      [p]atent rights are transferred if and only if all commercially significant rights to a patent, as defined in [section]801.1(o), for any therapeutic area (or specific indication within a therapeutic area)...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT