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Pharmaceutical Research & Mfrs. of Am. v. Federal Trade Commission

United States District Court, D. Columbia.

May 30, 2014

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

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[Copyrighted Material Omitted]

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For PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, Plaintiff: Joseph A. Ostoyich, BAKER BOTTS, LLP, Washington, DC.

For FEDERAL TRADE COMMISSION, Defendant: Michele Arington, LEAD ATTORNEY, John F. Daly, FEDERAL TRADE COMMISSION, Office of General Counsel, Washington, DC.

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MEMORANDUM OPINION

BERYL A. HOWELL, United States District Judge.

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

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parties' cross motions for summary judgment. See Pl.'s Mot. Summ. J. (" Pl.'s Mot." ), ECF No. 13; Def.'s Mot. 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 a patent 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

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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

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exempts altogether certain classes of transactions from the reporting 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 and appropriate 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 3254 [6] [ i.e., the pharmaceutical industry]

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. . . constitutes an asset acquisition . . . if and only if all commercially significant rights to a patent . . . for any therapeutic 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 exclusive rights to a patent in the pharmaceutical industry [for a specific therapeutic area]. . . constitute[s] a potentially reportable asset acquisition." Premerger Notification; Reporting and Waiting Period Requirements, 77 Fed. Reg. 50,057, 50,058 (Aug. 20, 2012); JA at 2. The NPRM proposed a new paragraph to 16 C.F.R. § 801.2 stating that the transfer of patent rights covering products for which the manufacture and sale would generate revenues in the pharmaceutical industry, are reportable acquisitions when " [a]ll commercially significant rights" are transferred even if the patent holder retains " limited manufacturing rights" or " co-rights," as defined in the new proposed definitions at 16 C.F.R. § 801.1 (o), (p) and (q), respectively. 77 Fed. Reg. at 50,061; JA at 5. Since the discussion in the NPRM about the proposed rule is repeated and supplemented in the Final Rule, the Court summarizes the background and rationale for the new definitions and new paragraph comprising the challenged rule in the discussion of the Final Rule.

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The FTC received three comments in response to the NPRM, two in support and one in opposition. JA at 16-21 (Comment 1 from Antonio Burrell, private citizen) (Oct. 25, 2012) (supporting the rule); id. at 22-68 (Comment 2 from PhRMA (" PhRMA Comment" )) (Oct. 25, 2012) (opposing the rule); and id. at 69 (Comment 3 from Clyde Dinkins, private citizen) (Aug. 13, 2012) (supporting the rule as " long overdue" ). In support of its critical comment, PhRMA submitted the declaration of economic consultant Thomas R. Varner (" Varner Decl." ), who was retained by PhRMA. See generally Varner Decl., JA at 38-68. After the close of the comment period on October 25, 2012, 78 Fed. Reg. at 68,706; JA at 8, PhRMA met with Commissioners on the FTC on four different occasions to discuss the proposed rule. See JA at 71 (Summary of Communications: Apr. 18, 2013 meeting between PhRMA and FTC Chairwoman Edith Ramirez and FTC staff); JA at 70 (Summary of Communications: Apr. 3, 2013 meeting between PhRMA and FTC Commissioner Joshua D. Wright and his advisers); JA at 75 (Summary of Communications: Mar. 13, 2013 meeting between PhRMA and FTC Commissioner Julie Brill and her attorney advisors and staff); JA at 77 (Summary of Communications: Feb. 26, 2013 meeting between PhRMA and FTC Commissioner Maureen K. Ohlhausen and her attorney advisors). Over the course of these meetings, PhRMA submitted " additional information about [the] projected costs" of the proposed rule, see JA at 72-74 (Letter dated June 7, 2013, from plaintiff's counsel to an FTC Commissioner), reiterated the objections discussed in its comment to the proposed rule, and raised three additional objections: (1) the rule conflicted with international antitrust principles of nondiscrimination, id. at 70, 71, 77; (2) pharmaceutical transactions subject to the proposed rule would be easy to unwind, id. at 70, 75; and (3) the proposed rule would set a bad precedent, id. at 77.

2. The Final Rule

Notwithstanding the critical views expressed by PhRMA in response to the NPRM and in meetings with FTC Commissioners, the Final Rule was promulgated without any changes from the proposed version on November 15, 2013, and became effective on December 16, 2013. 78 Fed. Reg. at 68,705; JA at 7; see also 78 Fed. Reg. at 68,706; JA at 8 (stating that " [a]fter carefully considering the comments," the FTC decided to " adopt[] the rule as proposed" ). The Final Rule rested on the FTC's authority under 15 U.S.C. 18a(d) " to require that premerger notification be in such form and contain such information and documentary material as may be necessary and appropriate," and " to define the terms used in the Act and prescribe such other rules as may be necessary and appropriate to carry out the purposes" of the section. 78 Fed. Reg. at 68,705-06; JA at 7-8 (citing 15 U.S.C. § 18a(d)(1), (2)). The rule " is limited to the pharmaceutical industry," but makes clear that " to the extent [] other industries engage in similar exclusive licensing transactions, such transactions remain potentially reportable events under the Act," and that the FTC continued " to assess the appropriateness of a rule for other industries." 78 Fed. Reg. at 68,706; JA at 8

A brief review of the practice of transferring exclusive patent rights, as described in the Final Rule (and the NPRM), is helpful in understanding the context for the FTC's action.

a) Transfer of Exclusive Patent Rights

As noted, while the HSR Act sets out statutory minimum threshold size requirements for reportable acquisitions, 15 U.S.C. § 18a(a), the Act also authorizes the FTC to define critical terms in order

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to target those transactions triggering the reporting requirement, id. § 18a(d)(2)(A). A patent is considered an asset by the FTC, the transfer of which may be reportable. 78 Fed. Reg. at 68,706 & n.4; JA at 8 & n.4 (citing SCM Corp. v Xerox Corp., 645 F.2d 1195, 1210 (2d Cir. 1981), for proposition that " [s]ince a patent is a form of property . . . and thus an asset, there seems little reason to exempt patent acquisitions from scrutiny under" the HSR Act). Transactions may, however, involve the transfer of certain exclusive patent rights without transferring the patent in its entirety, which requires a more searching analysis of the nature of the rights being transferred. See id. According to the FTC, the transfer of the " right to commercially use [a] patent, or a part of [a] patent, to the exclusion of all others . . . is substantively the same as buying the patent or part of the patent outright" and is " a potentially reportable asset acquisition under the Act." Id. " For years" the Premerger Notification Office (" PNO" ), the division of the FTC that administers the premerger notification program, Def.'s Mem. at 3, would evaluate whether the transfer of rights to a patent was potentially reportable by analyzing whether the exclusive rights to " make, use, and sell" under a patent were being transferred, see 78 Fed. Reg. at 68,706; JA at 8 (" [T]he PNO had only to verify that the transfer involved the exclusive right to use a patent or part of a patent to develop a product, manufacture the product, and sell that product without restriction" ); see also Def.'s Mem. at 4. The FTC explained that " [a]lthough never codified, the 'make, use and sell' approach became well-known throughout the HSR bar and is reflected in the numerous letters and emails from practitioners in the PNO's informal interpretation database on its Web site," 78 Fed. Reg. at 68,706 & n.8; JA at 8 & n.8 (including in a footnote a link to the online location of the informal interpretation database).

The Final Rule discussed two categories of patent rights transfers that, according to the FTC, appeared predominantly, if not exclusively, in the pharmaceutical industry. 78 Fed. Reg. at 68,707-08; JA at 9-10. The first category of transactions occurs when the licensor sells exclusive rights to use and sell a patent to a licensee, but retains for itself manufacturing rights. Id. The FTC noted that " in the pharmaceutical industry, the right to manufacture is less important than the right to commercialize," such that transferring use and sale rights to a patent and retaining " the right to manufacture solely for the licensee . . . has the same effect as a transfer to the licensee of all patent rights" under the " make, use, and sell" approach. 78 Fed. Reg. at 68,708; JA at 10. The second category of transactions occurs when the licensor retains co-rights, which are " shared rights to assist the licensee in developing and commercializing the patented product and includes rights to co-develop, co-promote, co-market, and co-commercialize," even though the licensor has already granted the licensee " an exclusive license to 'make, use, and sell' under a patent." 78 Fed. Reg. at 68,707; JA at 9. Under such agreements, the licensor does not retain the right " to commercially use the patent or part of the patent" and, consequently, even under the " make, use, and sell" approach, such transaction is potentially reportable under " the PNO staff's established position." Id. These two categories of patent rights transfers, where the licensor retains only manufacturing rights or co-rights, are the subject of the FTC's Final Rule.

b) Need for Proposed Rule

According to the FTC, transfers of exclusive patent rights covered by the Final Rule " carr[y] the same potential anticompetitive

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effects" as buying a patent outright. 78 Fed. Reg. at 68,706; JA at 8; see also 78 Fed. Reg. at 68,709; JA at 11 (transfers of patent rights subject to the Final Rule " are functionally equivalent to patent transfers and are thus properly viewed as asset acquisitions under the Act" ); 78 Fed. Reg. at 68,711; JA at 13 (" Like patent sales, exclusive patent licenses prevalent in the pharmaceutical industry are asset acquisitions that may produce anticompetitive effects." ). Further, in the FTC's view, " [a]llowing such transactions to go unreported would deprive the Commission of an opportunity, consistent with the purpose of the Act, to review these significant asset acquisitions that, like other reportable asset acquisitions, are potentially anticompetitive." 78 Fed. Reg. at 68,709; JA at 11. Consequently, the Final Rule adopts the " all commercially significant rights" concept to determine whether the exclusive rights to a patent are an " asset" subject to reporting under the Act, as proposed in the NPRM. 78 Fed. Reg. at 68,707; JA at 9; see also 77 Fed. Reg. at 50,059; JA at 3. The FTC pointed out that the test for " 'all commercially significant rights'" adopted in the rule " captures more completely what the 'make, use, and sell' approach was a proxy for, namely whether the license has transferred the exclusive right to commercially use a patent or a part of a patent." 78 Fed. Reg. at 68,707; JA at 9. The FTC stated that " the amended reporting requirements are necessary to effectuate the purposes of the HSR Act," which " is intended to allow the Agencies to review significant transactions to determine, prior to consummation of a transaction, if it is anticompetitive." 78 Fed. Reg. at 68,711; JA at 13. The FTC clarified that the rule only codified " the PNO's long-standing position that the retention of co-rights does not render a license to the patent or part of the patent as non-exclusive," and explained that " a reportable asset transfer may occur even if the licensor retains the limited right to manufacture under the patent or part of a patent for the licensee." 78 Fed. Reg. 68,707; JA at 9; see also id. (" [W]ith the exception of the treatment of the right to manufacture exclusively for the licensee, the rule treats the reportability of exclusive licensing arrangements, including those where the licensor retains co-rights, in the same way that the PNO has for decades." ).

c) Justification for Limiting Rule to the Pharmaceutical Industry

The FTC limited the Final Rule to the pharmaceutical industry based upon the following four findings: First, " exclusive patent licensing agreements that transfer all of the rights to commercially use a patent or part of a patent almost solely occur in the pharmaceutical industry." 78 Fed. Reg. at 68,708; JA at 10; see also id. (" [T]he PNO typically does not see exclusive transfers of rights to a patent or part of a patent outside the pharmaceutical context, and this is likely a result of the incentives that characterize the industry." ).

Second, the use of this transfer mechanism in the pharmaceutical industry is growing. 78 Fed. Reg. at 68,706; JA at 8 (" In recent years . . . it has become more common for pharmaceutical companies to transfer most but not all of the rights to 'make, use and sell' under an exclusive license, such that [this] approach is no longer adequate in evaluating the reportability of exclusive licenses in the pharmaceutical industry for HSR purposes." ); see also 78 Fed. Reg. at 68,707; JA at 9 (" [D]ue to the evolution of pharmaceutical patent licenses, the 'make, use, and sell' approach is no longer adequate to evaluate the HSR reportability of exclusive patent licenses in the pharmaceutical industry." ).

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Third, according to the FTC, transfers of exclusive patent rights in the pharmaceutical industry operate differently as compared to other industries. 78 Fed. Reg. at 68,708; JA at 10. As explained in the Final Rule, a licensor typically grants exclusive patent rights to a licensee in exchange for the requisite resources and funding to complete the FDA approval process, whereas in other industries, the sale of a patent comes " at a much later stage in development, and the patent owner can simply sell the patent for its proven value." Id. [10] Further, outside the pharmaceutical industry, licensors are typically incentivized to " engag[e] as many licensees as possible," rather than to grant exclusive licenses, as in the pharmaceutical industry. Id. The FTC explained that it reached this conclusion " [b]ased on HSR filings and requests for advice on the reportability of transactions," id., noting that the FTC found that " [p]ractitioners who represent clients in the pharmaceutical industry have often sought guidance from the PNO about" the acquisitions covered by the Final Rule, 78 Fed. Reg. at 68,706; JA at 8. Consequently, the Final Rule was limited to the pharmaceutical industry because " this is where the need for clarification arises and where the Commission has experience with the relevant transactions." 78 Fed. Reg. at 68,708; JA at 10. The Final Rule elaborated that, since 2008,

the PNO received filings for 66 transactions involving exclusive patent licenses, and all were for pharmaceutical patents. The PNO has not found other industries that rely on these types of arrangements. Although it is possible for other industries to engage in the kind of exclusive licensing that typifies the pharmaceutical industry, the PNO has not processed filings related to these kinds of exclusive licenses in any other industry in the past five years. In addition, requests for guidance on the treatment of exclusive patent licensing transactions have generally been limited to the pharmaceutical industry. Accordingly, the Commission has not found a need for a rule applicable to other industries.

Id. (emphasis added). The Final Rule reiterated the points made in the NPRM that the rule would " address the evolving structure of exclusive patent licenses in the pharmaceutical industry, [and] provide[] the Agencies with a more effective means of reviewing exclusive patent licenses meeting the statutory requirements under the Act." 78 Fed. Reg. at 68,707; JA at 9.

Finally, the FTC limited the new rule to one industry because it " need not take an all-or-nothing approach . . . [but] may proceed incrementally" in promulgating regulations and " may limit rules to those areas where [it has] observed a problem to be addressed." 78 Fed. Reg. at 68,709-10; JA at 11-12. The FTC believed it was " not required to resolve a problem that may occur more broadly 'in one fell regulatory swoop'" but will, instead, " continue to assess the appropriateness of a rule for other industries." 78 Fed. Reg 68,710; JA at 12.

d) Consideration and Rejection of PhRMA's Objections

Throughout the Final Rule, the FTC addressed the objections PhRMA raised in

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its comment to the NPRM. See generally 78 Fed. Reg. at 68,705-13; JA at 7-15. Specifically, PhRMA criticized the proposed rule for three significant perceived shortcomings, none of which were determined by the FTC to warrant modification or rejection of the rule as proposed in the NPRM.

i. Objection to Treatment of Retained Co-Rights

First, PhRMA objected to the PNO's uniform treatment of the retention of co-rights as " unclear and/or inconsistent," because it failed to " differentiate between the kinds, magnitude, or scope of co-rights being retained," as required under the HSR Act. 78 Fed. Reg. at 68,707; JA at 9. PhRMA reasoned that such a " blanket rule . . . mak[ing] the nature, extent, and other terms of co-rights retained by a licensor irrelevant to the transaction's HSR reportability is at a minimum overbroad." PhRMA Comment at 12; JA at 33. The FTC gave two reasons for rejecting the objection. First, the FTC explained that the new approach reflected in the Final Rule treated co-rights consistently with the prior " make, use and sell" approach, " as illustrated by numerous informal interpretations" available on the FTC's public informal interpretations database. 78 Fed. Reg. at 68,707; JA at 9. Second, the asset transfer determination " does not hinge" on the scope of the co-right retained, " but on whether the exclusive patent license allows only the licensee to commercially use the patent[.]" Id.

ii. Objection to Limitation to Pharmaceutical Industry

Second, PhRMA vigorously objected to limiting the Final Rule to the pharmaceutical industry on five separate grounds, ranging from the use by other industries of similar patent rights transfers and extending to challenging the fundamental authority of the agency to issue such a rule. Each of these grounds were addressed in the Final Rule. First, in PhRMA's view, " there are agreements in other industries that involve the retention of manufacturing rights," which undermines the agency's rationale for restricting the Final Rule to the pharmaceutical industry. 78 Fed. Reg. at 68,708; JA at 10. In support of this objection, PhRMA cited examples identified in the Varner Declaration of license agreements in which a party retains manufacturing rights occurring outside of the pharmaceutical industry. See PhRMA Comment at 9 & n.36; JA at 30 & n.36; Varner Decl. at 12-14; JA at 49-51. These agreements include " licensors licens[ing patent rights] on an exclusive basis . . . and retain[ing] manufacturing rights" in the chemical, electronic component, and medical device industries. Varner Decl. at 12-14; JA at 49-51; see, e.g., Varner Decl. at 13; JA at 50 (" Electronic Components: Licensor Sanken Electric Co., Ltd., entered into a Distribution Agreement with Allegro MicroSystems, Inc. in which Sanken licensed on an exclusive basis semiconductor technologies and retained the manufacturing rights." ); Varner Decl. at 14; JA at 51 (" Medical Device Industry: Licensor Unique Mobility, Inc. entered into a License Agreement and a Supply Agreement with Invacare Corporation in which Unique Mobility licensed patented motor technology for wheelchairs on an exclusive basis and retained the manufacturing rights." ). The FTC declined to expand the rule across industries for two reasons. First, although acknowledging the examples of agreements of purportedly similar rights transfers in other industries, the FTC viewed such arrangements as distinct from the patent rights transfers covered in the Final Rule. Specifically, the FTC explained that the proffered examples " are exclusive distribution agreements, which convey to the licensee only

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the exclusive right to distribute the patented product . . . [and] the licensor retains not just the right to manufacture but all commercially significant rights to the patent," by contrast to the type of transaction the FTC sought to regulate by promulgation of this rule. 78 Fed. Reg. at 68,708; JA at 10 (citing and distinguishing the Varner Declaration). Second, the FTC noted that, other than these distribution agreements, PhRMA " has not identified any other industry in which exclusive patent licenses, as opposed to exclusive distribution agreements, are common." 78 Fed. Reg. at 68,709; JA at 11.

Second, PhRMA contested the premise expressed in the NPRM restricting the Final Rule to the pharmaceutical industry on the basis that manufacturing is less important in the pharmaceutical industry than the right to commercialize. 78 Fed. Reg. at 68,708; JA at 10. Again, relying on the Varner Declaration, PhRMA's Comment pointed out that " the right to manufacture in pharmaceuticals can be important," in part because pharmaceutical products may have patents based on, inter alia, manufacturing technologies. See Varner Decl. at 15; JA at 52. As support, the declaration listed a number of agreements in the pharmaceutical industry that grant manufacturing, process, or production patents. Id. at 15-16; JA at 52-53; see, e.g., Varner Decl. at 16; JA at 53 (" Merck & Co, Inc. entered into an Asset Transfer and License Agreement with Guilford Pharmaceuticals Inc. in which " Process Patents" are specified" ); id. (" Amgen Inc. entered into a License and Commercialization Agreement with InterMune Pharmaceuticals, Inc. in which 'Manufacturing Patents' are specified" ). In response, the FTC stated that the referenced discussion in the NPRM was not " a general assessment of the value of manufacturing," but only sought to " provide a possible explanation as to why the PNO sees exclusive patent licenses in the pharmaceutical industry structured the way they are structured, namely more and more frequently without the transfer of manufacturing rights." 78 Fed. Reg. at 68,708; JA at 10.

Third, PhRMA objected to the Final Rule's restriction to the pharmaceutical industry based on the industry's unique " regulatory hurdles," " incentives[,] and market structure," since these characteristics may be found in other industries. Id. The Final Rule acknowledged PhRMA's identification of other industries that encounter the same " regulatory hurdles" and, further, that have similar " royalty rates" reflecting that " the incentives to maximize future profits are no different." Id. ; see also Varner Decl. at 9-11; JA at 46-48. Nevertheless, the FTC explained that " [t]he rule is limited to the pharmaceutical industry not because of the uniqueness of the incentives in that industry but because it is the only industry to the PNO's knowledge in which exclusive patent licenses are prevalent." 78 Fed. Reg. at 68,708-09; JA at 10-11; see also 78 Fed. Reg. at 68,709; JA at 11 (" [T]he exclusive patent licenses frequently seen in the pharmaceutical industry have not been seen by the PNO in other industries." ). The FTC clarified that its discussion of incentives and market structure was not a justification for restricting the rule, ...


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