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Pharmaceutical Research & Manufacturers of America v. Federal Trade Commission

United States Court of Appeals, District of Columbia Circuit

June 9, 2015


Argued: March 24, 2015.

Appeal from the United States District Court for the District of Columbia. (No. 1:13-cv-01974).

Evan A. Young argued the cause for appellant. With him on the briefs were Aaron M. Streett, Shane Pennington, Wm. Bradford Reynolds, Joseph A. Ostoyich, and James F. Rill.

Michele Arington, Assistant General Counsel, Federal Trade Commission, argued the cause for appellee. With her on the brief were William J. Baer, Assistant Attorney General, U.S. Department of Justice, Kristen C. Limarzi, Chief, Appellate Section, Robert J. Wiggers, Attorney, Jonathan E. Nuechterlein, General Counsel, Federal Trade Commission, David C. Shonka, Principal Deputy General Counsel, and Joel Marcus, Assistant General Counsel. John F. Daly, Attorney, Federal Trade Commission, appeared as trial counsel.

Before: GRIFFITH, Circuit Judge, MILLETT, Circuit Judge, and EDWARDS, Senior Circuit Judge. OPINION filed by Senior Circuit Judge Edwards.


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Edwards, Senior Circuit Judge:

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the " Act" or " HSR Act" ) was passed by Congress " [t]o improve and facilitate the expeditious and effective enforcement of the antitrust laws." Pub. L. No. 94-435, 90 Stat. 1383, 1383 (codified as amended at 15 U.S.C. § 18a). The Act added Section 7A to the Clayton Antitrust Act of 1914, 15 U.S.C. § 12 et seq., to establish notification and waiting requirements for large acquisitions and mergers. The principal purpose of the Act is to facilitate Government identification of mergers and acquisitions likely to violate federal antitrust laws before the proposed deals are consummated. The Federal Trade Commission (" FTC" or " Commission" ), with the concurrence of the Assistant Attorney General for the Antitrust Division, has extensive authority under the Act to define terms in the HSR Act and to promulgate regulations necessary to carry out the purposes of the Act.

In 2013, following notice and comment rulemaking, the FTC modified its reportable asset acquisition regulations to clarify that, even if patent holders retain limited manufacturing rights or co-rights, transfers of patent rights within the pharmaceutical industry constitute reportable asset acquisitions if all commercially significant rights are transferred (the " Rule" ). Premerger Notification; Reporting and Waiting Period Requirements (" Notice of Final Rulemaking" ), 78 Fed.Reg. 68,705, 68,706-07 (Nov. 15, 2013). Before the adoption of this Rule, the FTC had considered a transfer of patent rights to be a reportable asset acquisition only if all rights to make, use, and sell the patent were passed to the acquiring person. The FTC's 2013 rulemaking action clarified that reportable asset requirements apply to transactions in the pharmaceutical industry in which the licensor transfers exclusive patent rights but retains limited

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manufacturing rights or co-rights to the patent. The FTC explained that the Rule focuses on the pharmaceutical industry because the agency had not found any other industry that relied on this type of patent transfer arrangement. The Commission made it clear, however, that if other industries adopted patent transfer practices of the sort found in the pharmaceutical industry, " such exclusive patent licenses remain potentially reportable." Id. at 68,709.

In 2013, Appellant, Pharmaceutical Research and Manufacturers of America (" PhRMA" ), filed suit in District Court challenging the FTC's Rule. The District Court granted summary judgment for the FTC, Pharm. Research & Mfrs. of Am. v. FTC, 44 F.Supp.3d 95 (D.D.C. 2014), and PhRMA now appeals. PhRMA's appeal to this court rests on several causes of action arising under Section 706 of the Administrative Procedure Act (" APA" ), 5 U.S.C. § 706. First, PhRMA contends that the Rule should be overturned under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), either because it is precluded by the plain meaning of the Act or because it is based on an impermissible interpretation of the Act. Second, PhRMA argues that the FTC's action in adopting the Rule was arbitrary and capricious and therefore the Rule should be vacated pursuant to the commands of Motor Vehicle Manufacturers Association of the United States, Inc. v. State Farm Mutual Automobile Insurance Company (" State Farm " ), 463 U.S. 29, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983), and its progeny. We find no merit in these claims.

It is noteworthy that PhRMA does not challenge the FTC's authority to regulate the pharmaceutical industry or the particular patent transfers at issue in the Rule. Indeed, PhRMA has made no argument in this appeal that the Rule would be inconsistent with the Act or violate the APA if it applied generally. As a result there is no claim before the court that the FTC erred in its determination that the patent transfers identified by the Rule are reportable asset acquisitions under the HSR Act. PhRMA merely challenges the form of the Rule in that it focuses on the pharmaceutical industry.

We affirm the judgment of the District Court because none of PhRMA's claims has merit. Nothing in the plain meaning, context, or legislative history of the Act unambiguously precludes the FTC from promulgating a rule, the substance of which is clearly within its delegated authority, merely because the rule focuses on a specific industry that is the sole source of the problem being addressed. Congress did not address the " precise question at issue" here, but it did " explicitly [leave] a gap [in the statute] for the agency to fill." Chevron, 467 U.S. at 843. Therefore, the only " question for the court is whether the agency's answer is based on a permissible construction of the statute." Id. We answer that question in the affirmative. The Rule is obviously consistent with the purpose of the 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. And the FTC's explanation for its promulgation of the Rule is perfectly reasonable and supported by the record.

We also reject PhRMA's arguments that the FTC's adoption of the Rule was arbitrary and capricious. The Commission reasonably explained and supported its position during the rulemaking process, and PhRMA was in no way prejudiced by any alleged lack of opportunity to comment on the proposed rule.

I. Background

A. The HSR Act

As noted above, the Act fosters Government identification of mergers and acquisitions

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likely to violate federal antitrust laws before the proposed transactions are consummated. Pharm. Research, 44 F.Supp.3d at 100 (citing S. Rep. No. 94-803, at 1 (1976); H.R. Rep. No. 94-1373, at 5 (1976); Mattox v. FTC, 752 F.2d 116, 119-20 (5th Cir. 1985)). The statute states in part that,

[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 (or in the case of a tender offer, the acquiring person) 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 . . . .

15 U.S.C. § 18a(a). A merger or acquisition triggers the Act's requirements if one of the parties " is engaged in commerce or in any activity affecting commerce" and one of the threshold financial values defined in the Act is met. Id. § 18a(a)(1), (2). The HSR Act does not define " asset[]," " acquire," or " person." It does, however, list a number of exempt transactions, id. § 18a(c), none of which are relevant here.

The Commission's delegated authority under the Act is extensive. The Act provides in relevant part that:

The Federal Trade Commission, with the concurrence of the Assistant Attorney General and by rule in accordance with section 553 of Title 5, consistent with the purposes of this section--
(1) 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; and
(2) may--
(A) define the terms used in this section;
(B) exempt, from the requirements of this section, classes of persons, acquisitions, transfers, or transactions which are not likely to violate the antitrust laws; and
(C) prescribe such other rules as may be necessary and appropriate to carry out the purposes of this section.

Id. § 18a(d).

The Act also provides enforcement mechanisms for the FTC and the Assistant Attorney General. The FTC or the Assistant Attorney General may apply to the United States district courts to " order compliance" or " grant such other equitable relief as the court in its discretion determines necessary or appropriate." Id. § 18a(g)(2)(A), (C). It also provides for civil penalties of up to $10,000 for each day against " [a]ny person, or any officer, director, or partner thereof, who fails to comply with any provision of this section." Id. § 18a(g)(1).

B. The Rule

The FTC's disputed Rule is premised on certain undisputed assumptions: the Act covers asset acquisitions; a patent is an asset; therefore, the acquisition of a patent is potentially reportable under the Act. See Premerger Notification; Reporting and Waiting Period Requirements (" Notice of Proposed Rulemaking" ), 77 Fed.Reg. 50,057, 50,058 (Aug. 20, 2012). Prior to the adoption of the Rule, the FTC had determined that a transfer of rights to a patent was a reportable asset acquisition only if all of the rights to " make, use, and sell" a patent or part of a patent were exclusively

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transferred to the licensee. This was because " [a]n exclusive license is substantively the same as buying the patent or part of the patent outright, and carries the same potential anticompetitive effects." Notice of Final Rulemaking, 78 Fed.Reg. at 68,706.

Transactions in the pharmaceutical industry caused the FTC to reconsider its position regarding when transfers of patents are reportable asset acquisitions. In the ...

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