Pharmaceutical Association Calls Out FTC in Filing Seeking to Enjoin New Rule Targeting the Industry

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Last November, the Federal Trade Commission (“FTC”) with the “concurrence” of the Antitrust Division of the Justice Department, and over the strenuous objection of Pharmaceutical Research and Manufacturers of America (“PhRMA”), issued final changes to the Hart-Scott-Rodino Act premerger notification rules limited solely to pharmaceutical industry. Those special rules relate to the transfer of certain pharmaceutical patent rights, which the FTC treats as asset acquisitions for HSR reporting purposes. A few days before the new rule took effect on December 16, PhRMA filed suit in federal district court challenging the new rule claiming, among other things, that it exceeds the scope of the FTC’s authority by burdening the pharmaceutical industry “alone.” PhRMA has now moved for summary judgment asking the court to declare the new rule unlawful, to vacate it, and to enjoin enforcement of it in all respects.

So, what’s at stake here? Plenty, according to PhRMA’s filing.  Beyond the added delay imposed by complying with the new rule, PhRMA estimates that the additional expense imposed on the pharmaceutical industry will range on average from roughly $2.4 million to $3.6 million annually. And, if the FTC issues a “second request,” which PhRMA’s filing says should be expected each year, the expense would be even more. According to estimates cited by PhRMA, compliance with such a request can range from $5 million per transaction up to $20 million in very complex cases.

Why did the FTC single out the pharmaceutical industry? The FTC says it limited the new rules to the pharmaceutical industry because “this is where the need for clarification” is and “where the Commission has experience with the relevant transactions.” According to the FTC, for the five-year period ending December 31, 2012, it received filings for 66 transactions involving exclusive patent licenses, and all were for pharmaceutical patents. The FTC also says that its new rules simply capture more completely its approach and long-standing position. Namely, the new rules provide that (1) the transfer of exclusive rights to a patent or part of a patent in the pharmaceutical industry is a reportable asset transfer if it allows only the recipient to commercially use the patent as a whole, or part of the patent in a particular therapeutic area or specific indication within a therapeutic area, (2) the retention of co-rights does not render a license to the patent or part of the patent as non-exclusive, and (3) a reportable asset transfer may occur even if the licensor retains the limited right to manufacture under the patent or part of the patent for the licensee.

But why not include all other industries too? The FTC says that in its “experience, the pharmaceutical industry is the only industry in which the parties regularly enter into exclusive patent licenses that transfer all commercially significant rights.” The FTC does say that if it “finds that such arrangements occur in other industries, the Agencies can then assess the appropriateness of a similar rule for those other industries.” But beware, warns the FTC: “Even in the absence of a specific rule concerning other industries, however, such exclusive patent licenses remain potentially reportable [under the Hart-Scott-Rodino Act].”

What does this mean in terms of your contemplated pharmaceutical license deal? For now, the new rules still apply, so you should consider involvement of antitrust counsel. Changes in the future depend on what happens with PhRMA’s challenge as it works its way through the court.