Pharmaceutical Research and Manufacturers of America v. Federal Trade Commission ( 2014 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
PHARMACEUTICAL RESEARCH AND
MANUFACTURERS OF AMERICA,
Plaintiff,
Civil Case No. 13-1974 (BAH)
v.
FEDERAL TRADE COMMISSION, Judge Beryl A. Howell
Defendant.
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.’s
1
In compliance with Local Civil Rule 7(n), the FTC filed a certified list of the contents of the Administrative
Record in this case, see ECF No. 14, and also filed a Joint Appendix, which appears to contain the entirety of the
AR. Relevant citations are made to the Joint Appendix.
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
2
The parties have requested oral argument on the pending motion, Compl. at 25; Pl.’s Mot. at 1; Def.’s Mot. at 1,
but given the sufficiency of the parties’ written submissions, this request is denied. See D.D.C. Local Rule 7(f)
(allowance of oral hearing is “within the discretion of the court”).
2
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 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.
3
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 the
3
The HSR Act amended the Clayton Antitrust Act of 1914, see 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), and is codified in the U.S. Code as follows: Title I in 15 U.S.C. §§ 1311–14 and 18 U.S.C. § 1505; Title II,
which is at issue in the instant litigation, in 15 U.S.C. § 18a; and Title III in 15 U.S.C. § 15c–15h. See Pub. L. No.
94-435; Mattox, 752 F.2d at 119.
4
The minimum size requirements for an acquisition to trigger notification requirements under the HSR Act specify
that parties must report transactions where:
[A]s a result of such acquisition, the acquiring person would hold an aggregate total amount of the
voting securities and assets of the acquired person--
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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
(A) in excess of $200,000,000 (as adjusted and published for each fiscal year beginning after
September 30, 2004, in the same manner as provided in section 19(a)(5) of this title to reflect the
percentage change in the gross national product for such fiscal year compared to the gross national
product for the year ending September 30, 2003); or
(B)(i) in excess of $50,000,000 (as so adjusted and published) but not in excess of $200,000,000
(as so adjusted and published); and
(ii)(I) any voting securities or assets of a person engaged in manufacturing which has annual net
sales or total assets of $10,000,000 (as so adjusted and published) or more are being acquired by
any person which has total assets or annual net sales of $100,000,000 (as so adjusted and
published) or more;
(II) any voting securities or assets of a person not engaged in manufacturing which has total assets
of $10,000,000 (as so adjusted and published) or more are being acquired by any person which has
total assets or annual net sales of $100,000,000 (as so adjusted and published) or more; or
(III) any voting securities or assets of a person with annual net sales or total assets of
$100,000,000 (as so adjusted and published) or more are being acquired by any person with total
assets or annual net sales of $10,000,000 (as so adjusted and published) or more.
15 U.S.C. § 18a(a)(1), (2)(A)–(B). The minimum size requirements have been updated since the passage of the
HSR Act, compare id., with Pub. L. No. 94-435 tit. II, § 7A(a)(2), pursuant to the FTC’s authority to make annual
updates that “reflect the percentage change in the gross national product,” see District of Columbia
Appropriations—FY 2001, Pub. L. No. 106-553, 114 Stat. 2762 (2000), but such changes are immaterial to the
resolution of the instant motion.
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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 32546 [i.e., the pharmaceutical industry] . . . constitutes an asset
acquisition . . . if and only if all commercially significant rights to a patent . . . for any
5
The language of subsections (c) and (d) has remained largely unchanged in the nearly four decades since the HSR
Act was passed in 1976. Compare 15 U.S.C. § 18a(c)(1)–(12), (d), with Pub. L. No. 94-435 tit. II, § 7A(c) and (d).
6
The NAICS (North American Industry Classification System) is a code system developed for the benefit of
businesses and Federal statistical agencies under the auspices of the White House Office of Management and Budget
that numerically classifies industries based on the activities they engage in. See INTRODUCTION TO NAICS,
http://www.census.gov/eos/www/naics/ (last revised Feb. 27, 2014). The Final Rule specifies that the industries
comprising NAICS Industry Group 3254 are: medical and botanical manufacturing, pharmaceutical preparation
manufacturing, in-vitro diagnostic substance manufacturing, and biological product (except diagnostic)
manufacturing. 78 Fed. Reg. at 68,705.
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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
7
The term “all commercially significant rights,” as used in the Final Rule’s new paragraph describing “all
commercially significant rights” subject to reporting, is defined in the Final Rule to “mean[] 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 (or
specific indication within a therapeutic area).” 77 Fed. Reg. at 50,061; JA at 5.
8
The term “limited manufacturing rights,” as used in the Final Rule’s new paragraph describing “all commercially
significant rights” subject to reporting, is defined to “mean[] the rights retained by a patent holder to manufacture
the product(s) 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. The retained right to
manufacture is limited in that it is retained by the patent holder solely to provide the recipient of the patent rights
with product(s) covered by the patent (which either the patent holder alone or both the patent holder and the
recipient may manufacture).” Id.
9
The term “co-rights,” as used in the Final Rule’s new paragraph describing “all commercially significant rights”
subject to reporting, is 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. These co-rights
include, but are not limited to, co-development, co-promotion, co-marketing and co-commercialization.” Id.
7
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 (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.
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
8
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. 18(a)(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
9
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 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
10
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
11
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 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
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“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
10
The FTC provided an explanatory scenario that “[t]he PNO quite frequently sees”: an innovator discovers and
obtains a patent for a compound but lacks the resources to bring it to market, and subsequently enters into an
exclusive licensing agreement with a typically larger pharmaceutical company that will usher the drug through the
FDA approval process and subsequent marketing and promotion. 78 Fed. Reg. at 68,708; JA at 10. While the
licensee reaps the lion’s share of any profits, the innovator-licensor receives a smaller share of profits “through
royalties or other revenue sharing arrangements.” Id.
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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 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
15
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
16
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 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
17
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
18
that its discussion of incentives and market structure was not a justification for restricting the
rule, but was raised to “help explain” why transferring patent rights in the pharmaceutical
industry “takes the form of an exclusive license instead of an outright sale.” 78 Fed. Reg. at
68,709; JA at 11.
Fourth, PhRMA objected on the same grounds raised in this lawsuit, that the FTC does
not have the authority to “expand[] the Act’s requirements with respect to only a single
industry.” Id. In PhRMA’s view, the plain language and legislative history of the HSR Act
reflect Congress’s intent for uniform application of the FTC’s regulations, and, consequently, the
FTC has never before promulgated an HSR rule that “increases the [HSR] Act’s requirements for
only a single industry, nor has it even tried to do so until now.” PhRMA Comment at 3; JA at
24; see also PhRMA Comment at 4–5; JA at 25–26 (reasoning that Congress “nowhere granted
the FTC authority to increase the HSR Act’s reporting burden for only a single industry” ). By
contrast to other statutory schemes, where Congress has explicitly imposed additional filing
requirements on the pharmaceutical industry, Congress has not done so under the HSR Act.
PhRMA Comment at 4–5; JA at 25–26. The FTC disagreed with this statutory interpretation for
two reasons. First, the FTC stated its view that the Final Rule was not an expansion of the FTC’s
statutory authority, nor an expansion of the HSR Act’s coverage, but a rulemaking to determine
which types of transactions already covered by the HSR Act constitute asset transfers requiring
notification. 78 Fed. Reg. at 68,709; JA at 11. Second, the FTC stated that “Section
18(a)(d)(2)(B), which grants the Commission [exemption] authority . . . does not limit the broad
and discretionary rulemaking authority granted in Sections 18a(d)(2)(A) and (C).” Id. It further
reasoned that “[t]he authority to exempt specific industries or transactions from the Act’s filing
19
requirements is not inconsistent with the authority to implement these requirements on an
industry-specific basis prior to consummation of these agreements.” Id.
Finally, PhRMA objected that applying the rule selectively on an industry-specific basis
was “arbitrary and capricious” for failure to provide sufficient evidentiary support. PhRMA
Comment at 8; JA at 29. As support for this objection, PhRMA stated that the FTC does not
provide “facts and analysis” or objective evidence in support of the rule but “offers up only its
own [agency] ‘expertise,’” which is insufficient. Id. Furthermore, since the licensing
transactions subject to the rule “are not limited to the pharmaceutical industry” and are found in
other industries, which have the same incentives for retaining co-rights and manufacturing rights
as the pharmaceutical industry, the industry-specific rule is not well-reasoned. PhRMA
Comment at 9–10; JA at 30–31. The FTC disagreed, providing three reasons justifying its
adoption of the rule as proposed. First, the FTC explained that the rule applied to the
pharmaceutical industry “because the PNO has not received filings over the past five years for
exclusive patent licensing arrangements in other industries and requests for guidance on the
treatment of exclusive patent licensing arrangements have nearly always come from practitioners
in the pharmaceutical industry.” 78 Fed. Reg. at 68,709; JA at 11. The FTC added that its
experience allows it “to tailor the rule to the pharmaceutical industry.” Id. Second, the FTC
stated that its experience “indicated a need for a rule for the pharmaceutical industry” but that “at
this time, the [FTC] has not yet determined that a specific rule is necessary with respect to other
industries.” Id. The FTC stated that to the extent they occur, such transfers of exclusive rights
may still be reportable “under the Act and existing HSR rules.” Id. Third, the FTC stated that it
“may limit rules to those areas where they have observed a problem to be addressed,” id., and
20
that the FTC “need not take an all-or-nothing approach” but may “proceed incrementally,” 78
Fed. Reg. at 68,710; JA at 12.
iii. Objections As To Cost
As a third category of objections to the Final Rule, PhRMA raised concern over the costs
of the proposed rule. Specifically, PhRMA’s objected to the premerger notification requirement
because the filing cost would have a negative impact on small businesses, 78 Fed. Reg. at
68,711; JA at 13, by “increas[ing] by at least 50% the number of HSR filings required annually
by members of the pharmaceutical industry” resulting in “substantial” costs “with small
businesses bearing a significant brunt of” these costs. PhRMA Comment at 13; JA at 34. The
FTC rejected this predicted impact on small businesses for three reasons. First, the FTC stated
that a transaction “must be valued at more than $50 million (as adjusted)” to fall under the HSR
Act, which “typically [would] not catch most transactions involving small entities.” 78 Fed.
Reg. at 68,710; JA at 12. Second, the FTC reasoned that because the HSR Act requires a party
to the transaction to have at least $10 million in sales, the “size of person test also ensures that
the Act does not regularly reach small entities.” Id. Third, the FTC stated that any small
business having to file such notification “would in most instances be filing under the Act as the
acquired person in the context of an asset transaction and would therefore be submitting less
information” resulting in less of a burden on small entities. Id. Regarding the concerns that such
increased filing costs “could chill pharmaceutical transactions,” the FTC responded that such
filing costs are relatively small compared to “the profits at stake in the multi-million dollar
transactions reportable under the Act,” and thus, would not be a deterrent. Id. Moreover, the
FTC pointed out that the parties would likely “conduct a patent valuation as part of their due
21
diligence notwithstanding HSR” and that therefore the transferring parties would already be
incurring these costs regardless of the promulgation of the Final Rule. Id.
Additionally, related to the concern over cost, the FTC analyzed the cost estimates of
filing requirements and filing fees submitted by PhRMA in its original comment and
supplemental documentation. JA at 72–74 (Letter dated June 7, 2013, from plaintiff’s counsel to
an FTC Commissioner); 78 Fed. Reg. at 68,711–12; JA at 13–14; see also PhRMA Comment at
13–14; JA at 34–35. The FTC concluded that PhRMA’s estimates were higher than those of the
FTC’s, and consequently adjusted its burden increase estimate “out of an abundance of caution
and in light of the comments.” 78 Fed. Reg. at 68,712; JA at 14; see also id. (responding to
PhRMA comment’s concern regarding the costs of responding to additional information
requests).
e) PhRMA’s Complaint
Less than a week before the effective date of the Final Rule, PhRMA filed the instant
action challenging the FTC’s promulgation of the Final Rule. See generally Compl. PhRMA
alleges in three claims under the APA that the issuance of the Final Rule was: (1) “in excess of
[the FTC’s] statutory jurisdiction, authority, or limitations” under the HSR Act, 5 U.S.C. §
706(2)(C); Compl. ¶¶ 89–93 (Count I); (2) “arbitrary, capricious, and an abuse of discretion,” 5
U.S.C. § 706(2)(A); Compl. ¶¶ 94–100 (Count II); and (3) “without observance of procedure
required by law,” 5 U.S.C. § 706(2)(D); Compl. ¶¶ 101–06 (Count III). Count Four of PhRMA’s
complaint seeks a declaratory judgment “clarifying the legal relations of the parties.” Compl. ¶¶
107–09 (Count IV). In addition, PhRMA seeks vacatur of the Rule, attorneys’ fees, and a
permanent injunction preventing the FTC and its officers from “enforcing, applying, or
22
implementing” the Final Rule. Compl. at 26.
The parties’ cross-motions for summary judgment are now pending before this Court.
See Pl.’s Mem.; Def.’s Mem.
II. STANDARD OF REVIEW
A. Summary Judgment Standard
Pursuant to Federal Rule of Civil Procedure 56, summary judgment may be granted when
the Court finds, based upon the pleadings, depositions, and affidavits and other factual materials
in the record, “that there is no genuine dispute as to any material fact and the movant is entitled
to judgment as a matter of law.” FED. R. CIV. P. 56(a), (c); see Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 247 (1986). “A genuine issue of material fact exists if the evidence, ‘viewed in a
light most favorable to the nonmoving party,’ could support a reasonable jury’s verdict for the
non-moving party.” Muwekma Ohlone Tribe v. Salazar, 708 F.3d 209, 215 (D.C. Cir. 2013)
(quoting McCready v. Nicholson, 465 F.3d 1, 7 (D.C. Cir. 2006)).
When, as here, “a party seeks review of agency action under the APA, the district judge
sits as an appellate tribunal. The ‘entire case’ on review is a question of law.” Am. Bioscience,
Inc. v. Thompson, 269 F.3d 1077, 1083 (D.C. Cir. 2001) (citing Marshall Cnty. Health Care
Auth. v. Shalala, 988 F.2d 1221, 1226 (D.C. Cir. 1993); and Univ. Med. Ctr. of S. Nevada v.
Shalala, 173 F.3d 438, 440 n. 3 (D.C. Cir. 1999)). Accordingly, this Court need not and ought
not engage in lengthy fact finding, since “[g]enerally speaking, district courts reviewing agency
action under the APA’s arbitrary and capricious standard do not resolve factual issues, but
operate instead as appellate courts resolving legal questions.” James Madison Ltd. by Hecht v.
Ludwig, 82 F.3d 1085, 1096 (D.C. Cir. 1996); see also Sierra Club v. Mainella, 459 F. Supp. 2d
23
76, 90 (D.D.C. 2006) (“Under the APA . . . the function of the district court is to determine
whether or not as a matter of law the evidence in the administrative record permitted the agency
to make the decision it did.”) (quotation marks and citation omitted)); accord McDonough v.
Mabus, 907 F. Supp. 2d 33, 42 (D.D.C. 2012); Wilson v. McHugh, 842 F. Supp. 2d 310, 315
(D.D.C. 2012). Judicial review is limited to the administrative record. 5 U.S.C. § 706(2) (“[T]he
Court shall review the whole record or those parts of it cited by a party . . . .”); Florida Power &
Light Co. v. Lorion, 470 U.S. 729, 743–44 (1985) (in applying the arbitrary and capricious
standard under the APA, “[t]he focal point for judicial review should be the administrative
record already in existence . . . .” (quoting Camp v. Pitts, 411 U.S. 138, 142 (1973))).
B. Chevron Framework
The D.C. Circuit has applied the familiar two-step process set out in Chevron U.S.A., Inc.
v. Natural Res. Def. Council, Inc. (Chevron), 467 U.S. 837, 842 (1984), for judicial review
determining whether an agency has acted “in excess of statutory jurisdiction, authority or
limitations, or short of statutory right” under the APA. See Am. Fed’n of Gov’t Emps., AFL-CIO,
Local 3669 v. Shinseki, 709 F.3d 29, 32–33 (D.C. Cir. 2013). The court must begin at Chevron
Step One by “ask[ing] whether Congress has directly addressed the precise question at issue.”
Mayo Found. for Med. Educ. & Research v. United States, 131 S. Ct. 704, 706 (2011) (internal
citations omitted). “‘If the intent of Congress is clear, that is the end of the matter; for the court,
as well as the agency, must give effect to the unambiguously expressed intent of Congress.’”
City of Arlington, Tex. v. FCC, 133 S. Ct. 1863, 1868 (2013) (quoting Chevron, 467 U.S. at 842–
43). A statute that is unambiguous “means that there is ‘no gap for the agency to fill’ and thus
‘no room for agency discretion.’” United States v. Home Concrete & Supply, LLC, 132 S. Ct.
24
1836, 1843 (2012) (quoting Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545
U.S. 967, 982–83 (2005)). To discern whether Congress has addressed the precise question, the
court applies the “traditional tools of statutory construction.” Id. at 1844 (quoting Chevron, 467
U.S. at 843 n.9). These tools include evaluation of the plain statutory text at issue, the purpose
and structure of the statute as a whole, while giving effect, if possible, to every clause and word
of a statute, and—where appropriate—the drafting history. See Loving v. IRS, 742 F.3d 1013,
1016 (D.C. Cir. 2014) (quoting Pharm. Research & Mfrs. of Am. v. Thompson, 251 F.3d 219,
224 (D.C. Cir. 2001)); see also Duncan v. Walker, 533 U.S. 167, 174 (2001); Bell Atl. Tel. Co. v.
FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997).
If the statute is silent or ambiguous with respect to the specific issue under consideration,
however, the analysis shifts to Chevron Step Two, where “the question for the court is whether
the agency’s answer is based on a permissible construction of the statute.” City of Arlington,
Tex., 133 S. Ct. at 1868. The job of the courts is not to engage in “their own interstitial
lawmaking” and “mak[e] public policy by prescribing the meaning of ambiguous statutory
commands.” Id. at 1873. Rather, the “archetypal Chevron questions, about how best to construe
an ambiguous term in light of competing policy interests” belongs to the “agencies that
administer the statutes.” Id. When Congress has delegated to the agency authority to make rules
carrying the force of law, and the challenged agency interpretation was promulgated in the
exercise of that authority, then the agency’s rule is entitled to deference “as long as it is a
permissible construction of the statute, even if it differs from how the court would have
interpreted the statute in the absence of an agency regulation.” Sebelius v. Auburn Reg’l Med.
Ctr., 133 S. Ct. 817, 826 (2013); see also Nat’l Cable & Telecomms. Ass’n, 545 U.S. at 980 (“If
25
a statute is ambiguous, and if the implementing agency’s construction is reasonable, Chevron
requires a federal court to accept the agency’s construction of the statute, even if the agency’s
reading differs from what the court believes is the best statutory interpretation.”).
Even when Congress has not provided the agency an express delegation of authority or
responsibility “‘to implement a particular provision or fill a particular gap, [ ] it can still be
apparent from the agency’s generally conferred authority and other statutory circumstances that
Congress would expect the agency to be able to speak with the force of law when it addresses
ambiguity in the statute or fills a space in the enacted law, even one about which Congress did
not actually have an intent as to a particular result.’” Home Concrete & Supply, LLC, 132 S. Ct.
at 1843–44 (quoting United States v. Mead Corp., 533 U.S. 218, 229 (2001)). Agencies are
owed deference under Chevron even where their interpretation of an ambiguous statutory
provision “could be said to delineate the scope of the agency’s jurisdiction.” Verizon v. FCC,
740 F.3d 623, 635 (D.C. Cir. 2014) (noting that “the Supreme Court has recently made [this]
clear”); see also City of Arlington, Tex., 133 S. Ct. at 1870 (holding that “there is no difference,
insofar as the validity of agency action is concerned, between an agency’s exceeding the scope of
its authority (its ‘jurisdiction’) and its exceeding authorized application of authority that it
unquestionably has” (emphasis in original)).
C. Administrative Procedure Act
Under the APA, a reviewing court shall “hold unlawful and set aside agency action,
findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with law,” 5 U.S.C. § 706(2)(A), “in excess of statutory jurisdiction,
26
authority, or limitations, or short of statutory right,” id. § 706(2)(C), or “without observance of
procedure required by law,” id. § 706(2)(D).
In evaluating agency actions under the “arbitrary and capricious” standard, courts must
consider “whether the [agency’s] decision was based on a consideration of the relevant factors
and whether there has been a clear error of judgment.” Marsh v. Oregon Natural Res. Council,
490 U.S. 360, 378 (1989) (citation and internal quotation marks omitted); Citizens to Preserve
Overton Park v. Volpe, 401 U.S. 402, 416 (1971); Blue Ridge Envtl. Def. League v. Nuclear
Regulatory Comm’n, 716 F.3d 183, 195 (D.C. Cir. 2013). The scope of review under this
standard “is narrow and a court is not to substitute its judgment for that of the agency.” Motor
Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co. (State Farm), 463 U.S. 29, 30 (1983); see
also Verizon, 740 F.3d at 644 (citing Nat’l Tel. Coop. Ass’n v. FCC, 563 F.3d 536, 541 (D.C.
Cir. 2009)); Agape Church, Inc. v. FCC, 738 F.3d 397, 408 (D.C. Cir. 2013) (citing Cablevision
Sys. Corp. v. FCC, 597 F.3d 1306, 1311 (D.C. Cir. 2010)).
“[T]he arbitrary and capricious standard is ‘highly deferential’ and ‘presumes agency
action to be valid[.]’” Am. Trucking Ass’ns, Inc. v. Fed. Motor Carrier Safety Admin., 724 F.3d
243, 245 (D.C. Cir. 2013) (quoting Am. Wildlands v. Kempthorne, 530 F.3d 991, 997 (D.C. Cir.
2008)); Envtl. Def. Fund, Inc. v. Costle, 657 F.2d 275, 283 (D.C. Cir. 1981). If an agency,
however, “failed to provide a reasoned explanation, or where the record belies the agency’s
conclusion, [the court] must undo its action.” Cnty. of Los Angeles v. Shalala, 192 F.3d 1005,
1021 (D.C. Cir. 1999). At the very least, the agency must have reviewed relevant data and
articulated a satisfactory explanation establishing a “rational connection between the facts found
and the choice made.” State Farm, 463 U.S. at 43 (internal quotation marks omitted); see also
27
Pub. Citizen, Inc. v. FAA, 988 F.2d 186, 197 (D.C. Cir. 1993) (“The requirement that agency
action not be arbitrary or capricious includes a requirement that the agency adequately explain its
result.”).
“[A]n agency acts arbitrarily or capriciously if it ‘has relied on factors which Congress
has not intended it to consider, entirely failed to consider an important aspect of the problem,
offered an explanation for its decision that runs counter to the evidence before the agency, or is
so implausible that it could not be ascribed to a difference in view or the product of agency
expertise.’” Am. Wildlands, 530 F.3d at 997–98 (quoting State Farm, 463 U.S. at 43). While the
agency’s explanation cannot “run[ ] counter to the evidence,” State Farm, 463 U.S. at 43, courts
should “uphold a decision of less than ideal clarity if the agency’s path may reasonably be
discerned,” Bowman Transp., Inc. v. Arkansas–Best Freight Sys., Inc., 419 U.S. 281, 286 (1974).
Furthermore, when an agency has acted in an area in which it has “special expertise,” the court
must be particularly deferential to the agency’s determinations. Sara Lee Corp. v. Am. Bakers
Ass’n Ret. Plan, 512 F. Supp. 2d 32, 37 (D.D.C. 2007) (quoting Bldg. & Constr. Trades Dep’t,
AFL–CIO v. Brock, 838 F.2d 1258, 1266 (D.C. Cir. 1988)). “Deferring as appropriate to the
agency’s expertise and looking only for ‘a rational connection between the facts found and the
choice made,’” Am. Trucking Ass’ns, Inc., 724 F.3d at 249 (quoting State Farm, 463 U.S. at 43),
“we remain ever mindful that in performing ‘a searching and careful inquiry into the facts, we do
not look at the [agency’s] decision as would a scientist, but as a reviewing court exercising our
narrowly defined duty of holding agencies to certain minimal standards of rationality.’” Id.
(quoting Nat’l Envtl. Dev. Ass’ns Clean Air Project v. EPA, 686 F.3d 803, 810 (D.C. Cir. 2012)).
28
III. DISCUSSION
In challenging the Final Rule regulating the transfer of certain exclusive patent rights in
the pharmaceutical industry, PhRMA contends that the limited application of the Rule to the
pharmaceutical industry exceeds the FTC’s grant of statutory authority under the HSR Act,
Compl. ¶¶ 89–93 (Count I), in violation of 5 U.S.C. § 706(2)(C), and was arbitrary and
capricious, Compl. ¶¶ 94–100 (Count II), in violation of 5 U.S.C. § 706(2)(A). See Pl.’s Mem. at
1–2. PhRMA further argues that the Rule should be set aside because the FTC failed to include
in the rulemaking record the factual basis for its decision contrary to the procedure required by
law, Compl. ¶¶ 101–06 (Count III), in violation of 5 U.S.C. § 706(2)(D), by failing to include in
the rulemaking record the factual basis for its decision. See Pl.’s Mem. at 29–30. The FTC
cross-moves for summary judgment, contending: (1) the FTC is entitled to Chevron deference in
its interpretation of the HSR Act’s grant of authority to promulgate industry-specific rules, Def.’s
Mem. at 9–15; and (2) the FTC provided a reasoned basis for its promulgation of the Rule that
was supported by sufficient facts referenced in publicly available information, Def.’s Mem. at
15–28. For the reasons set out below, the Court agrees with the FTC.
A. FTC is Entitled to Deference on Scope of Statutory Authority
PhRMA contends that the FTC has exceeded its grant of authority under the HSR Act by
promulgating a rule that applies only to the pharmaceutical industry because Congress has
directly spoken on the issue and expressed its intent to have the premerger notification
requirements apply uniformly across all industries. Pl.’s Mem. at 16–22. Thus, PhRMA asserts
that the Court’s analysis may stop at Chevron Step One because “Congress has directly
addressed the precise question at issue.” Mayo Found. for Med. Educ. & Research, 131 S. Ct. at
29
706 (internal citations omitted). PhRMA supports this argument with four points: (1) the FTC’s
power to exempt certain industries from premerger notification requirements under section
18a(d)(2)(B) does not grant the FTC authority to expand selectively the scope of the pre-merger
reporting requirements on a piecemeal basis, Pl.’s Mem. at 16–17; (2) the legislative history of
the HSR Act “confirms that Congress did not intend to give the FTC authority to extend the
Act’s coverage on such selective terms,” id. at 17–18; (3) industry-specific notification
requirements, such as those promulgated in the Final Rule, contravene the purpose of the HSR
Act, id. at 18–19; and (4) the FTC’s rulemaking authority, including the discretion to define the
terms in the HSR Act under subsection (d)(2)(A), and prescribe other “necessary and
appropriate” rules to carry out the purpose of the HSR Act under subsection (d)(2)(C), do not
otherwise grant the FTC the authority to issue an industry-specific rule, id. at 19–22. The FTC
disputes that Congress has directly addressed the issue in the HSR Act and instead contends,
under Chevron Step Two, that the agency’s interpretation of the statute is entitled to deference.
See Def.’s Mem. at 11–14.
The Court first addresses the parties’ arguments under Chevron Step One and concurs
with the FTC that the statute does not expressly address whether the HSR Act premerger
notification requirements may be applied selectively to a particular industry. Next, the Court
examines the parties’ arguments under Chevron Step Two, finding that the FTC’s interpretation
is entitled to deference.
1. HSR Act Does Not Directly Address Industry-Specific Rules
Subsection (a) of the HSR Act states that “[e]xcept as exempted pursuant to subsection
(c) of this section, no person shall acquire, directly or indirectly, any . . . assets of any other
30
person, unless both persons file notification . . . .” 15 U.S.C. § 18a(a) (emphasis added).
PhRMA seizes upon the “broad, unqualified” “no person” words to conclude that the HSR Act
was intended to apply with equal force across all industries, subject only to the exceptions under
subsection (c). Pl.’s Mem. at 16; Pl.’s Reply at 4–5. PhRMA’s narrow focus on these two words
is too thin a reed to rest its conclusion given the broader language granting the FTC rulemaking
and exemption authority.
To determine the plain meaning of a statute, the court must look not only to “the
particular statutory language at issue,” but also to “the language and design of the statute as a
whole.” K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988) (citations omitted); see also
United States v. Ali, 718 F.3d 929, 938 (D.C. Cir. 2013) (quoting FDA v. Brown & Williamson
Tobacco Corp., 529 U.S. 120, 133 (2000), for the proposition that “[i]t is a fundamental canon of
statutory construction that the words of a statute must be read in their context and with a view to
their place in the overall statutory scheme”). The court assumes “that the legislative purpose is
expressed by the ordinary meaning of the words used.” Sec. Indus. Ass’n v. Bd. of Governors,
468 U.S. 137, 149 (1984) (internal quotation and citations omitted). Here, the inclusion of the
“no person” words does not manifest Congress’s express intent to have the statute apply
uniformly because Congress also enumerated multiple broad exemptions, including a catch-all
exemption in subsection (c)(12), which the FTC is authorized to apply. Under subsection (c),
certain “classes of transactions” are expressly exempt from the HSR Act, including any
“acquisitions of goods or realty transferred in the ordinary course of business,” “acquisitions of
bonds, mortgages, deeds of trust, or other obligations which are not voting securities,” “transfers
to or from a Federal agency or a State or political subdivision,” and certain “acquisitions, solely
31
for the purpose of investment, by any bank, banking association, trust company, investment
company, or insurance company.” 15 U.S.C. § 18a(c)(1), (2), (4), (11). These exemptions
militate against finding that Congress intended uniform application of the reporting requirements
for three reasons. First, these statutory exemptions distinguish between industries. For example,
exemption (c)(11) exempts the banking industry from certain transactions that other industries
must report. This is an explicit recognition by Congress that crafting industry-specific rules may
be necessary to achieve the goals of the HSR Act. Second, while some exemptions are
circumscribed, Congress also included broad exemptions, such as transfers “in the ordinary
course of business.” id. § 18a(c)(1). Congress granted authority to the FTC to define the
transactions constituting transfers “in the ordinary course of business” and thereby limit the
otherwise potentially boundless scope of this exemption. See id. § 18a(d)(2)(A) (granting FTC
definitional authority). Third, the FTC was granted authority to exempt from the reporting
requirement “classes of persons, acquisitions, transfers, or transactions which are not likely to
violate the antitrust laws.” See 15 U.S.C. § 18a(d)(2)(B); see also id. § 18a(c)(12) (exempting
from reporting requirements “such other acquisitions, transfers, or transactions, as may be
exempted under subsection (d)(2)(B) of this section”). While the FTC is not permitted to exempt
a specific “person” from the reporting requirements, Section 18a(c)(12) and (d)(2)(B) authorize
the FTC to exempt general “classes” of persons or transactions. This plain language is
sufficiently broad to cover or exempt entire industries or certain classes of transactions within
industries. The broad scope of the exemptions provided in the HSR Act significantly
undermines PhRMA’s argument that the “no person” words reflect a Congressional intent for
uniform application of the reporting requirements, with only limited exemptions. To the
32
contrary, the nature of the statutory exemptions, combined with the express grants of authority to
the FTC to extend those exemptions even more broadly, make plain that the reporting
requirements were intended to be a scalpel, rather than a blunt sword, to target precisely those
transactions actually posing an antitrust threat.
PhRMA acknowledges that subsection (d)(2)(B) grants the FTC exemption authority, but
contends that this authority is “narrowly drawn, authorizing the agency to relieve certain classes
of persons or transactions” but not “to impose[] new burdens selectively on a targeted class of
persons (i.e., those in the pharmaceutical industry only).” Pl.’s Mem. at 17 (emphasis in
original). In other words, PhRMA’s view is that the FTC has authority to exercise forbearance,
but not to subject selected industries to regulation. This argument rests on two inter-related
premises: first, that the FTC’s definitional and rulemaking authority, under 15 U.S.C. § 18a
(d)(1), (d)(2)(A), and (d)(2)(C), which it exercised in promulgating the Final Rule, may only be
exercised to promulgate rules of general applicability; and, second, that the FTC may only use
its exemption authority, under 15 U.S.C. § 18a (c)(12) and (d)(2)(B), narrowly to relieve from,
not subject to, reporting requirements a class of persons or transactions. Pl.’s Mem. at 16–17,
19. PhRMA’s interpretation of the manner in which the FTC may exercise its definitional,
rulemaking, and exemption authority under the HSR Act is not implausible, but that is simply
not enough. In order “to prevail under Chevron step one, the [plaintiff] must do more than offer
a reasonable or, even the best, interpretation; it must show that the statute unambiguously
forecloses the [agency]’s interpretation.” See Vill. of Barrington, Ill. v. Surface Transp. Bd., 636
F.3d 650, 661 (D.C. Cir. 2011) (citing Chevron, 467 U.S. at 843 n.11). With regards to the first
premise, the FTC’s rulemaking and definitional authority are not expressly limited by the
33
requirement that the FTC promulgate only general rules and not industry-specific rules. For
example, subsection (d)(1) authorizes the FTC to require reporting “in such form” with “such
documentary material and information relevant to a proposed acquisition as is necessary and
appropriate to enable” a determination “whether such acquisition may, if consummated, violate
the antitrust laws.” 15 U.S.C. § 18a(d)(1). Rather than directing all documentation for every
covered acquisition to be the same, this provision authorized the enforcement agencies to focus
on “necessary and appropriate” documentation for a specific “proposed acquisition.” Likewise,
the FTC’s definitional authority is not restricted to bar selective application of regulations, but
rather gives the agency a blank slate to “define the terms used in this section.” 15 U.S.C. § 18a
(d)(2)(A). Finally, the rulemaking authority granted to the FTC is broadly awarded to “prescribe
such other rules as may be necessary and appropriate to carry out the purposes of this section.”
15 U.S.C. § 18a (d)(2)(C). Nothing in this text restricts the FTC to generating only general rules
rather than industry specific rules. In short, the FTC’s issuance of an industry-specific rule is not
foreclosed by the use of the words “no person” in the general prohibition, as PhRMA contends,
when contextual examination of this provision reveals such varied and open-ended exemptions
also authorized by Congress.
The D.C. Circuit’s decision in Environmental Defense Fund, Inc. v. EPA, 82 F.3d 451,
465 amended sub nom. Envtl. Def. Fund v. EPA, 92 F.3d 1209 (D.C. Cir. 1996), is illustrative of
this point, although not cited or discussed in the briefing on the pending cross-motions for
summary judgment. The plaintiff in that case made the same unsuccessful statutory
interpretation argument asserted by PhRMA here: namely, that a statute written with the
operative prohibition covering “[n]o department, agency or instrumentality” indicates Congress’s
34
intent that the regulations issued pursuant to that statute must apply uniformly. Id. At issue in
Environmental Defense Fund was a statutory provision providing that “[n]o department, agency,
or instrumentality of the Federal Government shall engage in . . . any activity” that does not
“conform” to an EPA implementation plan, which language, according to the plaintiff in that
case, “shows that the Congress intended the general conformity requirement to apply to every
activity of the federal government.” Id. The Circuit disagreed. It found that such language was
not “so rigid” that it must apply to all federal government activity, finding that, despite the
sweeping language, “nothing in the statute [] preclude[d]” the EPA from categorically exempting
certain federal government activities that produced de minimis emissions from conforming to the
EPA’s implementation plan. Id. at 466–67. Rather, the Circuit remarked that “it seems
eminently reasonable for the EPA to interpret this provision to refer to ‘any activity’ that is likely
to interfere with the attainment goals” in the statute rather than any activity undertaken by the
federal government. Id. In other words, the D.C. Circuit rejected the argument that the “no
department, agency, or instrumentality” language at issue there, similarly to the “no person”
language highlighted by PhRMA here, necessarily entails broad, uniform application, as PhRMA
contends. Furthermore, in that case, unlike the instant case, the EPA was not expressly granted
the authority to exempt any “department, agency, or instrumentality” from the provisions of the
statute, yet the Court still found the agency authorized to grant exemptions from the purportedly
“broad prohibition” without contravening the statute’s terms. Id. at 465–67; see also id. at 456
n.7. Here, not only does the FTC have exemption authority, the “no person” language is further
qualified by exemptions that Congress enumerated.
35
The conclusion that PhRMA’s interpretation that the HSR Act requires uniform
application of reporting requirement to all “persons” is further undermined by a structural review
of the statute. The nature of the FTC’s rulemaking authority makes plain Congress’s intent for
the FTC to promulgate rules “necessary and appropriate to carry out the purposes of this
section.” 15 U.S.C. § 18a(d)(2)(C). Indeed, as another Judge on this Court found in American
Petroleum Institute v. SEC, 953 F. Supp. 2d 5, 20–23 (D.D.C. 2013), promulgating a rule of
general applicability may contravene Congress’s express intent that the FTC promulgate
“necessary and appropriate” rules. In American Petroleum, the Securities and Exchange
Commission (“SEC”)’s rulemaking was ruled arbitrary and capricious when the SEC
promulgated a rule of general applicability providing for no exemptions. Id. at 20, 23. The SEC
justified its general rule by stating that adopting exemptions “would be inconsistent with the
structure and language” of the statutory text and “would undermine Congress’ intent,” which the
SEC did not wish to “frustrate.” Id. at 21. Notably, the statute in that case contained language
similar to the HSR Act, granting the SEC discretion to “exempt in whole or in part any issuer or
class of issuers . . . upon such terms and conditions . . . as it deems necessary or appropriate” if
“not inconsistent with the public interest.” Id. The Court held that exercising this discretionary
exemption authority may “in some circumstances, be required by the Commission’s competing
statutory obligations,” such as a separate provision stating that the SEC “‘shall not adopt any . . .
rule or regulation which would impose a burden on competition not necessary or appropriate in
furtherance of the purposes of this chapter.” Id. (citing 15 U.S.C. § 78w(a)(2)) (emphasis
added). Similarly, here the FTC may be compelled by the terms of the HSR Act to issue a rule
that is not generally applicable when the FTC determines that it is not necessary or appropriate to
36
regulate similar transactions in other industries. This structural review of the Act lends further
support to the FTC’s interpretation that the agency’s authority is not limited to issuing only
generally applicable rules, as PhRMA contends, but rather that the statute requires otherwise in
some circumstances.
With regards to PhRMA’s second premise—that the FTC’s exemption authority under 15
U.S.C. § 18a(c) and (d)(2)(B)—allows for enforcement forbearance but not selective application
of certain regulations, is of limited relevance since this is not the source of the authority relied
upon by the FTC to promulgate the Final Rule. In any event, the word “exempt,” which is
defined as “to free or release from a duty or liability to which others are held,” see BLACK’S LAW
DICTIONARY 653 (9th ed. 2009), does not, standing alone, indicate that the number of entities
subject to “a duty or liability” must outnumber those entities “free[d] or release[d]” from a duty.
In other words, broad applicability of an exemption does not run afoul of the plain meaning of
the word “exempt.”
Nor is there any indication in the statute that Congress intended to foreclose the FTC’s
effective grant of such broad exemptions. The only limit on the FTC’s authority to exempt
“classes of persons” or transactions are that they “are not likely to violate the antitrust laws.” 15
U.S.C. § 18a(d)(2)(B). The D.C. Circuit has held that similar statutory language granting
exemption authority confers “very broad discretion” on the agency. See Nat’l Small Shipments
Traffic Conference, Inc. v. Civil Aeronautics Bd., 618 F.2d 819, 827 (D.C. Cir. 1980)
(interpreting plain meaning of agency’s authority to “exempt ‘any person or class of persons’
from ‘the requirements of this title or any provision thereof’ . . . if it finds that the exemption is
consistent with the public interest.”). Indeed, even when an agency is not expressly granted
37
exemption authority in the statute, the D.C. Circuit has held that “[c]ategorical exemptions from
the clear commands of a regulatory statute,” though disfavored, are permissible. Ala. Power Co.
v. Costle, 636 F.2d 323, 358–60 (D.C. Cir. 1979) (outlining situations where agency could
promulgate broad, categorical exemptions from statute even if “not explicitly provided in the
statute,” such as for the sake of administrative necessity or infeasibility, or if activity has de
minimis effect (citing Morton v. Ruiz, 415 U.S. 199 (1973); Nat’l Res. Def. Council, Inc. v.
Train, 510 F.2d 692 (1974)); and District of Columbia v. Orleans, 406 F.2d 957, 959 (1968))).
Given the FTC’s broad exemption authority, the agency could have achieved the same
purpose reflected in the Final Rule by issuing a generally applicable rule that exempted all
industries other than the pharmaceutical industry on the basis that similar transactions in other
industries do not pose an antitrust threat. Under PhRMA’s reasoning, formulation of the rule in
this manner would have comported with the FTC’s statutory authority. Requiring the FTC to
promulgate rules according to this formulation, however, would have the same effect as an
industry-specific regulation and would “elevate form completely over substance.” See Simmons
v. ICC, 697 F.2d 326, 332–34 (D.C. Cir. 1982) (finding that, in order to grant a partial
exemption, agency was not required to “first have to grant a total exemption and then revoke that
exemption in part” in “a two-step process” of rulemaking). The more faithful reading of the
HSR Act is that the FTC’s authority to promulgate industry-specific rules is not foreclosed by
the “no person” language. Indeed, as the D.C. Circuit held after evaluating the scope of another
agency’s exemption authority, even if Congress “did not expect that the [agency] would use its
exemption authority in a particular fashion[, this] does not indicate that Congress did not
38
authorize the [agency] to act in this manner” based on the plain language of the statute. Nat’l
Small Shipments Traffic Conference, Inc., 618 F.2d at 828.
Consequently, the plain language of the statutory text does not mandate that the FTC only
promulgate rules of general applicability and does not foreclose the FTC’s issuance of an
industry-specific rule. Given that Congress has not directly addressed the FTC’s authority in this
respect based on the plain text and structure of the HSR Act, the Court turns to legislative
history, which PhRMA insists supports its view that the FTC exceeded the agency’s statutory
authority.
2. The Legislative History Confirms That Congress Has Not Directly
Addressed the Issue
PhRMA points to two changes made in the precursor bills to the HSR Act to support its
contention that Congress expressly intended for uniform application of the premerger
notification requirements. See Pl.’s Mem. at 17–18; Pl.’s Reply at 5–8. The Court disagrees
with PhRMA’s interpretation of the legislative history and instead concludes that the record of
changes to bill language prior to enactment does not resolve the ambiguity in the statutory
language, or otherwise suggest that Congress intended to bar the FTC from promulgating
industry-specific rules.
First, PhRMA points out that the Senate’s version of the HSR Act, Senate Bill No. 1284,
included a provision, at section 7A(B)(2), which would have permitted the FTC to “impose
reporting burdens on certain ‘classes or categories’ of persons,” but the “House deliberately
removed that provision.” Pl.’s Mem. at 17–18 (emphasis in original). According to PhRMA,
this change “clear[ly]” reflects Congress’s intent “to impose pre-merger notification
requirements for like transactions only uniformly and even-handedly, not by selectively
39
burdening some with reporting obligations while leaving others unaffected.” Id. at 18. In further
support of this claim, PhRMA points to a statement by Senator Hart describing the removed
provision as one that “require[d] pre-merger notifications from particular companies or industries
or from any class or category of persons,” id. at 17 (quoting 122 CONG. REC. 29,342 (1976)), and
a statement from Representative Rodino explaining that the provision was omitted because “the
coverage of this bill should be decided by Congress—not the FTC and the Justice Department,”
id. at 18 (quoting 122 CONG. REC. 30,877 (1976)).
Contrary to PhRMA’s reading of the legislative history, the deletion of the Senate
provision cited by PhRMA does not reveal Congress’s intent to foreclose the FTC’s
promulgation of industry-specific rules. See Hart-Scott Antitrust Improvements Act of 1976, S.
1284, 94th Cong. § 7A(b)(2)(A)–(B) (1976). This deleted provision would have granted the FTC
the authority to require premerger notifications for any class of person or transaction,
“[n]otwithstanding any other provision of law or the applicability of subsection (a) of this
section,” which prescribes threshold size requirements to trigger the premerger reporting
requirements. Id. § 7A(b)(2). In other words, the removed Senate provision would have granted
the FTC discretion to compel parties to report any transaction, no matter how small. By
removing this provision, the House version made clear that the FTC could not compel reporting
of transactions falling below the size thresholds described in subsection (a). Nevertheless, as
Senator Hart explained, “[d]eletion of this provision is not intended to affect the authority of the
Federal Trade Commission to require such notification under existing provisions . . . .” 122
CONG. REC. 29,342 (1976) (statement of Sen. Hart). This clarifies that the FTC’s authority to
impose rules, create definitions, and exempt industries from the requirements of the section was
40
left intact for all transactions that meet the minimum size requirements.
Further, PhRMA’s invocation of Representative Rodino’s statement that “the coverage of
this bill should be decided by Congress—not the FTC and the Justice Department,” 122 CONG.
REC. 30,877 (1976), is unpersuasive. The fuller context of his remarks makes clear that
Representative Rodino’s concern was to bar the FTC from reaching out to regulate small
transactions, consistent with the clarifying statement of Senator Hart. Specifically,
Representative Rodino was concerned that the removed Senate provision “permitted the FTC . . .
to promulgate rules subjecting ‘small’ mergers—involving companies with less than $100
million and $10 million in sales or assets—to the notification and waiting requirements provided
by this bill.” Id.11 His remark that Congress should set the scope of the bill referred to
Congress’s responsibility to determine the applicability of the HSR Act based on the size of the
transaction, rather than to detract from the FTC’s authority to require notification for transactions
that meet the size requirements set out in subsection (a). The statements of Senator Hart and
Representative Rodino, and the removal of the Senate bill’s provision on which PhRMA relies,
do not speak directly to Congress’s intent that the FTC promulgate rules that require premerger
notification uniformly for any transaction that meets or exceeds subsection (a)’s minimum size
requirements. The legislative history only demonstrates that Congress did not wish to burden
small companies, or parties engaging in small transactions, with the HSR Act’s reporting
requirements.
Notably, after removing the disputed Senate provision from the bill, the House added
11
In the hearing explaining the House’s revisions to the Senate’s version of the HSR Act, Rep. Rodino stated that
“[i]t may in future years appear that additional coverage is desirable; for example, in industries that are ‘highly
concentrated’ . . . or with respect to a large firm that makes a series of acquisitions of firms below this bill’s $10
million size limits.” 122 CONG. REC. 30,877 (1976) (emphasis added).
41
subsection (d)(2)(B), granting the FTC authority to “exempt classes of corporations and
acquisitions, transfers, or transactions which are not likely to violate Section 7 of this Act from
the requirements of this section.” H.R. REP. NO. 94-1373, at 3 (1976) (reprinting the
amendments to the Clayton Act in H.R. 14580). This grant of broad exemption authority is a
clear indication of Congress’s support for the FTC to determine categories of transactions and
persons exempt from the HSR Act and, also, undermines PhRMA’s claim that Congress intended
uniform application of the HSR Act’s reporting requirements. Clearly, if the House’s intent were
to prohibit “piecemeal coverage” authorization “for transactions above and below the
thresholds,” as PhRMA contends, see Pl.’s Reply at 6, the House would not have added this
provision explicitly permitting the FTC to exempt certain industries or transactions from
subsection (a)’s reporting requirements. Contrary to PhRMA’s view, a more comprehensive
review of the legislative history shows that Congress contemplated a stark difference in the
FTC’s authority with respect to small transactions falling below subsection (a)’s minimum size
thresholds, and those transactions meeting the requirements and subject to premerger reporting.
Second, PhRMA points to the Senate’s removal of another provision from the version of
the Senate bill, S. 1284, that passed the Senate, as evidence of Congress’s “unwavering view that
the FTC was not authorized to target specific companies or industries for pre-merger coverage.”
Pl.’s Reply at 7–8. Specifically, an early version of the Senate bill gave the FTC authority “to
promulgate rules of general or special applicability as may be necessary or proper to the
administration of this section,” S. 1284, 94th Cong. § 7A(b)(4)(A) (1976), but this provision was
subsequently removed by its proponent because, as he explained, “it appeared to give the FTC
rulemaking authority ‘so broad and general as to undermine an otherwise carefully structured
42
statutory scheme.’” Pl.’s Reply at 8 (citing 122 CONG. REC. 15,812 (1976) (statement of Sen.
Hruska)). PhRMA selectively quotes from Senator Hruska’s statements on the matter. In full,
the Senator explained that the provision was removed because “[t]hese authorities are either
appropriately dealt with in other sections, or are so broad and general as to threaten to
undermine an otherwise carefully structured statutory scheme.” 122 CONG. REC. 15,812 (1976)
(emphasis added). The statement provides no further elaboration. This explanation is not
conclusive proof of “Congress’s unwavering view” that the FTC was not permitted “to fashion
rules of ‘special applicability’” as PhRMA contends. Pl.’s Reply at 8. At best, the statement is
ambiguous as to whether Congress intended to foreclose the FTC’s promulgation of industry-
specific rules. Moreover, the perfunctory statement of one Senator explaining the deletion of a
phrase in a draft version of a bill prior to the issuance of a new version of the bill ultimately
considered by the Senate does not indicate the “‘unambiguously expressed intent of Congress.’”
City of Arlington, Tex., 133 S. Ct. at 1868 (quoting Chevron, 467 U.S. at 842–43); see also N.
Haven Bd. of Ed. v. Bell, 456 U.S. 512, 526 (1982) (“[T]he statements of one legislator made
during debate may not be controlling (citing Chrysler Corp. v. Brown, 441 U.S. 281, 311
(1979))).
Consequently, PhRMA has not demonstrated that Congress has clearly spoken on the
FTC’s ability to promulgate industry-specific rules based on the legislative history.
3. The Purpose of the HSR Act Is Not Uniform Application, But Prophylactic
Prevention of Anticompetitive Mergers
PhRMA contends that the FTC is required to “exercise its rulemaking authority only in a
manner ‘consistent with the purposes’” of 15 U.S.C. § 18a, and that the Final Rule is inconsistent
with “the HSR Act’s grant to the FTC of authority exercisable only uniformly and even-handedly
43
as to all similarly situated ‘persons’ or ‘classes of persons.’” Pl.’s Mem. at 18–19. The only
statutory language relied on by PhRMA for this proposition are the “no person” words in
subsection (a), stating that “[e]xcept as exempted . . . no person” meeting the size requirements
under subsection (a) shall engage in a transaction without satisfying the notification
requirements. 15 U.S.C. § 18a(a); see also Pl.’s Reply at 9 (“The statute’s explicit command
[states] that FTC rulemaking for coverage of over-threshold transactions excuse ‘no person’ not
otherwise exempted . . . .”). PhRMA’s reliance on the “no person” words in subsection (a) to
divine Congress’s purpose does not support its argument because, as noted, other statutory
provisions granting both express exemptions and authority to the FTC to devise additional
appropriate exemptions demonstrate that Congress did not anticipate uniform application of the
HSR Act. See 15 U.S.C. § 18a(a), (c)(12), (d)(2)(B).
Indeed, the purpose of the HSR Act was not to ensure uniformity in the promulgation of
rules under the premerger notification requirements. To the contrary, the express statement of
purpose by the Senate and the House upon passage of the HSR Act was to combat illegal
acquisitions that violate antitrust laws. The Senate Report accompanying the Senate’s bill stated
that the purpose of the HSR Act “is to support and invigorate effective and expeditious
enforcement of the antitrust laws, to improve and modernize antitrust investigation and
enforcement mechanisms, to facilitate the restoration and maintenance of competition in the
marketplace, and to prevent and eliminate monopoly and oligopoly power in the economy.” S.
REP. NO. 94-803, at 1 (1976). The House report accompanying the House Bill, Antitrust
Premerger Notification Act, H.R. 14580, 94th Cong. (1976), stated that the purpose of the Act is
to “giv[e] the government antitrust agencies a fair and reasonable opportunity to detect and
44
investigate large mergers of questionable legality before they are consummated.” H. R. REP. No.
94-1373, at 5 (1976), reprinted in 1976 U.S.C.C.A.N. 2637, 1976 WL 13988; see also H.R.
14580, 94th Cong. (1976).12 The House Report described the history and need for the premerger
notification provisions, stating that “the chief virtue of this bill is that its provisions will help to
eliminate endless post-merger proceedings . . . and replace them with far more expeditious and
effective premerger proceedings.” H. R. REP. No. 94-1373, at 10 (1976). The Report further
states that the premerger notifications “will help prevent the consummation of so-called
‘midnight’ mergers, which are designed to deny the government any opportunity to secure
preliminary injunctions. It will ease burdens on the courts by forestalling interminable post-
consummation divestiture trials, [a]nd it will advance the legitimate interests of the business
community in planning and predictability.” Id. at 11.
Notably, nowhere do the Senate or House reports specify that the purpose of the HSR Act
is to ensure uniformity in the application of the premerger notification requirements. PhRMA
has not presented any evidence, other than the “no person” words, to support its contention that
the purpose of section 15 U.S.C. § 18a is to ensure application “only uniformly and even-
handedly,” Pl.’s Mem. at 19 (emphasis in original), particularly given the exemptions that
qualify subsection (a), including the FTC’s authority to exempt “classes of persons, acquisitions,
transfers, or transactions which are not likely to violate the antitrust laws.” 15 U.S.C. §
12
Two additional House reports were drafted to accompany two alternate versions of the HSR Act, H.R. 8532, 94th
Cong. (1975); H.R. 13489, 94th Cong. (1976), that were simultaneously considered with the third version, H.R.
14580, 94th Cong. (1976), which was ultimately enacted. See Pub. L. No. 94-435. The purpose of the HSR Act
enumerated in all three House Reports consistently support the conclusion that the purpose of the HSR Act was to
strengthen law enforcement tools. See H.R. REP. NO. 94-499(I), at 3 (1975) (purpose of the HSR Act is “to prevent
antitrust violators from being unjustly enriched, and to deter future antitrust violations”); H.R. REP. NO. 94-1343, at
1–3 (1976) (purpose of HSR Act is to “provide the Justice Department’s Antitrust Division with all the basic
investigative tools necessary for effective and expeditious investigations into possible civil violations of the federal
antitrust laws”).
45
18a(d)(2)(B). As noted, the statutory language alone, and the “no person” words in particular,
are unpersuasive indications that Congress directly addressed the issue. See Envtl. Def. Fund,
Inc., 82 F.3d at 465. Consequently, PhRMA cannot sustain its claim that the purpose of the HSR
Act directly prohibits the FTC’s promulgation of an industry-specific rule.
After review of the plain language, legislative history, and purpose of the HSR Act, the
Court concludes that Congress has not directly addressed the issue of whether the FTC may issue
industry-specific reporting requirements under the HSR Act. See Duncan, 533 U.S. at 174.
Consequently, the Court will proceed to Chevron Step Two to determine “whether the agency’s
answer is based on a permissible construction of the statute.” City of Arlington, Tex., 133 S. Ct.
at 1868.
4. Under Chevron Step Two, FTC’s Construction of the Statute is
Permissible
Mindful of the Supreme Court’s recent admonition that agencies are entitled to Chevron
deference even if they are interpreting an ambiguous statutory provision that governs the scope
of the agency’s own authority, see id., 133 S. Ct. at 1870; Verizon, 740 F.3d at 635, the Court
turns to the FTC’s interpretation of the statute. The FTC is authorized to “define the terms used”
in the Act and to “prescribe such other rules as may be necessary and appropriate to carry out the
purposes” of the Act, which the FTC construes as enabling it to promulgate an industry-specific
rule. See 15 U.S.C. § 18a(d)(2)(A), (C); see also 78 Fed. Reg. at 68,706; JA at 8. In the Final
Rule, the FTC interpreted its grant of authority under the HSR Act as providing the FTC “broad
authority to issue rules to facilitate the review of large transactions,” reasoning that “[n]othing in
the HSR Act prevents the Commission from issuing such rules on an industry-specific basis.” 78
Fed. Reg. at 68,709; JA at 11. With respect to its exemption power, the FTC contends that this
46
“does not limit the broad and discretionary rulemaking authority granted in Sections
18a(d)(2)(A) and (C),” and that this authority “is not inconsistent with the authority to implement
these requirements on an industry-specific basis[.]” Id. The FTC also explained that the Final
Rule was not “expanding the HSR requirements to parties or transactions not covered by the
Act,” but “simply clarifying the types of transactions that constitute asset transfers for which the
Act requires prior notification.” Id.
Such a rationale is a permissible construction of the authorities granted to the FTC under
the HSR Act. Although it may not be the best construction, or the construction this Court would
adopt, such alternative interpretations are immaterial to the Court’s inquiry because an agency’s
rule is entitled to deference “as long as it is a permissible construction of the statute, even if it
differs from how the court would have interpreted the statute in the absence of an agency
regulation.” Sebelius, 133 S. Ct. at 826; see also Nat’l Cable & Telecomms. Ass’n, 545 U.S. at
980 (“If a statute is ambiguous, and if the implementing agency’s construction is reasonable,
Chevron requires a federal court to accept the agency’s construction of the statute, even if the
agency’s reading differs from what the court believes is the best statutory interpretation.”
(citation omitted)).
PhRMA responds that the FTC’s interpretation of the HSR Act is unreasonable for three
reasons. First, PhRMA reiterates that Congress’s clear intent was uniform application of
reporting requirements. Pl.’s Reply at 10–11. As discussed in Parts III.A.1–3, supra, it is not
clear from the plain language, legislative history, or purpose of the Act that Congress’s intent
was to apply reporting requirements uniformly. Instead, the inclusion of subsection (d)(2)(B),
granting the FTC authority to exempt classes of persons and transactions “not likely to violate
47
the antitrust laws” strongly indicates that Congress envisioned reporting requirements tailored to
transactions that actually posed an antitrust threat, which, as the FTC points out, is not a
restriction of its rulemaking authority under subsections (d)(2)(A) and (C).
Second, PhRMA contends that the FTC has failed to point to any ambiguous statutory
text from which it could derive its implicit Congressional delegation of power. PhRMA relies on
Railway Labor Executives’ Association v. National Mediation Board, 29 F.3d 655, 664 n.5,
amended, 38 F.3d 1224 (D.C. Cir. 1994), for the contention that “statutory silence on the extent
of [an] agency’s power is ‘no ambiguity.’” Pl.’s Reply at 12. That case is distinguishable,
however, because the Court found “that Congress left no ambiguity” in the statute because the
agency action at issue directly contravened the text of the applicable statute. Id. at 664. No
statutory text directly forecloses the FTC’s authority to apply an industry-specific rule.
Moreover, in this argument, PhRMA misinterprets the deference owed to the FTC’s
interpretation under Chevron. PhRMA suggests that “the prerequisite to Chevron deference is
some indication that Congress chose to delegate a particular power,” and that the FTC has failed
to show “that Congress contemplated delegating the decision to discriminate against a particular
industry through increased coverage burdens.” Pl.’s Reply at 10 (emphasis in original). This is
simply not the FTC’s burden. As noted, once the Court has determined that Congress has not
directly addressed the issue, the agency is entitled to Chevron deference of its interpretation of
the scope of its authority. City of Arlington, Tex., 133 S. Ct. at 1870–71. Where, as here, the
statute is silent on the issue, the agency’s interpretation of its authority is due deference.
Third, PhRMA criticizes the FTC’s interpretation for failure to articulate a reasonable
basis that these patent license transactions “now suddenly pose an antitrust threat, let alone that
48
they pose such a threat in the pharmaceutical industry but not in any other.” Pl.’s Reply at 16.
PhRMA adds that the FTC’s caveat in its Final Rule that similar transactions occurring in other
industries “remain potentially reportable events under the Act” “cast[s] doubt on the Rule’s
‘necessity.’” Id. (quoting 78 Fed. Reg. at 68,706; JA at 8).13 To the extent PhRMA is arguing
that the FTC has exceeded its statutory grant of authority because it did not explain the necessity
of the promulgated rule, this argument overlaps with the challenge to the Final Rule for being
arbitrary and capricious, and will be addressed more fully in the next part of this Memorandum
Opinion. Briefly, the FTC stated in its Final Rule that the patent rights transfers covered by the
Final Rule “are functionally equivalent to patent transfers and are thus properly viewed as asset
acquisitions under the Act,” and “[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. The FTC further explained that the rule was
necessarily limited to the pharmaceutical industry because “[w]hile the PNO’s experience . . .
has indicated a need for a rule for the pharmaceutical industry, at this time the Commission has
not yet determined that a specific rule is necessary with respect to other industries.” Id. Such
explanation is sufficient to show both a need for the “all commercially significant rights” concept
and the limitation of the rule to the pharmaceutical industry. See Nat’l Ass’n of Broadcasters v.
FCC, 740 F.2d 1190, 1210 (D.C. Cir. 1984) (finding that the Circuit has “recognized the
13
PhRMA also argues that the FTC may not exercise its rulemaking authority to promulgate the industry-specific
Rule because, according to PhRMA, in a “blatant abuse of its delegated authority to define terms in the Act,” the
FTC has included three new terms—“all commercially significant rights,” “limited manufacturing rights” and “co-
rights”—in the “definitions” section of its regulations that “do not appear in the Act.” Pl.’s Mem. at 20 (emphasis in
original). As the FTC correctly explains, these terms are used to define the terms “asset” and “acquisition” which do
appear in the HSR Act, and the Commission “may of course use and define additional terms and concepts that do
not themselves appear in the Act.” Def.’s Mem. at 13–14. PhRMA does not dispute this explanation, see generally
Pl.’s Reply, and no further discussion is merited here.
49
reasonableness of [an agency’s] decision to engage in incremental rulemaking and to defer
resolution of issues raised in a rulemaking” given that “an agency would be paralyzed if all the
necessary answers had to be in before any action at all could be taken”).
Accordingly, because Congress has not directly spoken on the issue and the FTC has set
forth a permissible construction of its authority to issue industry-specific rules under the HSR
Act, under Chevron, the FTC’s promulgation of the Final Rule does not exceed its statutory
jurisdiction under 5 U.S.C. § 706(2)(C) and, consequently, is entitled to deference.
B. FTC’s Rulemaking Was Not Arbitrary, Capricious, or an Abuse of
Discretion
PhRMA contends that the rulemaking was arbitrary and capricious for three reasons.
First, according to PhRMA, the Final Rule was not the product of reasoned decisionmaking
because it did not establish “a rational connection between the facts found and the choice made”
to explain, both, why the exclusive patent rights targeted by the Final Rule are potentially
anticompetitive, and to justify the selective targeting of the pharmaceutical industry. Pl.’s Mem.
at 28. Second, the FTC’s “vague and unembellished references to agency ‘experience’” is not
the sort of reasoned analysis required by the APA to justify the FTC’s conclusion that exclusive
patent license transfers in the pharmaceutical industry, and no other industry, poses a potential
anticompetitive threat. Pl.’s Mem. at 23–24; id. at 28–29. Finally, the FTC’s explanation ran
“counter to the evidence before the agency,” and failed to respond to “substantial problems
raised by commenters,” including the problems identified in the Varner Declaration attached to
PhRMA’s comment to the NPRM. Pl.’s Mem. at 24–27. The Court addresses each of these
arguments in turn.
50
1. FTC Articulated a Rational Basis for Promulgating the Final Rule
The FTC explained in its NPRM the impetus behind adopting the “all commercially
significant rights” concept in its Final Rule. The FTC stated that the transfer of patent rights was
considered a reportable asset under the HSR Act, but that the widely-adopted, uncodified “make,
use, and sell” approach was “no longer adequate in evaluating the reportability of exclusive
licenses in the pharmaceutical industry for HSR purposes.” 78 Fed. Reg. at 68,706; JA at 8. The
FTC explained that adopting and applying the “all commercially significant rights” concept for
the transfer of patent rights better “address[es] the evolving structure of exclusive patent licenses
in the pharmaceutical industry, providing the [FTC] 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. The FTC explained that the “‘all commercially significant rights’ test 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.” Id. In other words, according to the FTC, the all commercially significant rights test is a
more accurate measure of whether the transfer of patent rights resembles the transfer of a patent
in the pharmaceutical industry, in order to determine whether the parties have transferred an
“asset” that is potentially reportable under the HSR Act.
The FTC articulated the reasons for limiting the Rule to the pharmaceutical industry,
stating that the agency “has found that 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, and that these transfers have
“become more common for pharmaceutical companies.” 78 Fed. Reg. at 68,706; JA at 8. The
51
FTC further stated that it “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.” 78 Fed. Reg. at 68,708; JA at 10. The FTC based this determination
“on HSR filings and requests for advice on the reportability of transactions,” id., adding 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.
According to the FTC, in the five years prior to promulgation of the Final Rule, the FTC
“received filings for 66 transactions involving exclusive patent licenses, and all were for
pharmaceutical patents.” 78 Fed. Reg. at 68,708; JA at 10. By contrast, “[t]he PNO has not
found other industries that rely on these types of arrangements . . . . [and] has not processed
filings related to these kinds of exclusive licenses in any other industry in the past five years.”
Id. Consequently, the FTC “has not found a need for a rule applicable to other industries.” Id.;
see also 78 Fed. Reg. at 68,709; JA at 11 (stating that “[w]hile the PNO’s experience . . . has
indicated a need for a rule for the pharmaceutical industry, at this time the Commission has not
yet determined that a specific rule is necessary with respect to other industries”). This analysis
provides cogent reasoning for the agency’s decision to promulgate the Final Rule and to restrict
the rule to the pharmaceutical industry.
The FTC further justified limiting the rule by stating that, generally, agencies “need not
take an all-or-nothing approach . . . [but] may proceed incrementally” when rulemaking, 78 Fed.
Reg. at 68,710; JA at 12, and “may limit rules to those areas where they have observed a
problem to be addressed,” 78 Fed. Reg. at 68,709; JA at 11. The FTC nevertheless noted that
“[i]f the PNO finds that such arrangements occur in other industries, [it] can then assess the
52
appropriateness of a similar rule for those other industries.” Id. The D.C. Circuit recently
affirmed an agency’s decision to promulgate rules using such a “step-by-step approach.” In
WildEarth Guardians v. U.S. EPA, No. 13-1212, 2014 WL 1887372 (D.C. Cir. May 13, 2014),
the plaintiff challenged the Environmental Protection Agency (“EPA”)’s denial of its petition for
rulemaking to regulate coal mines under the Clean Air Act, where the EPA stated that due to
“limited resources and ongoing budget uncertainties,” the EPA would not “commit to conducting
the process to determine whether coal mines should be” regulated as requested, id. at *1 (quoting
Notice of Final Action on Petition From Earthjustice To List Coal Mines as a Source Category
and To Regulate Air Emissions From Coal Mines, 78 Fed. Reg. 26,739 (May 8, 2013)), and was
instead “taking a common-sense, step-by-step approach intended to obtain the most significant
greenhouse-gas-emissions reductions through using the most cost-effective measures first,” id. at
*3, and may address the issue in a future rulemaking, id. at *1. The D.C. Circuit held that the
EPA’s decision not to initiate rulemaking on this basis “was within the scope of its statutory
authority, consistent with the record, and supported by reasoned decisionmaking,” because the
agency had “good reasons for prioritizing its regulatory agenda,” which it explained and
supported on the record. Id. at *6.
In the instant case, the FTC has similarly supported its incremental approach with a
sensible reason—the agency’s lack of experience with patent rights transfers outside the
pharmaceutical industry. The FTC need only provide a rational basis for its decision, see Am.
Trucking Ass’ns, Inc., 724 F.3d at 249 (quoting State Farm, 463 U.S. at 43) (finding that
reviewing courts “exercis[e] our narrowly defined duty [under the arbitrary and capricious
standard] of holding agencies to certain minimal standards of rationality.’”); State Farm, 463
53
U.S. at 43 (holding that agencies need only establish a “rational connection between the facts
found and the choice made,”); Pub. Citizen, Inc., 988 F.2d at 197 (holding that agency must
“adequately explain its result”), and it has done so, explaining the need for the rule, the need to
limit the rule to the pharmaceutical industry, for which the FTC has determined regulation is
“necessary and appropriate,” and further supported the rule on the basis of the FTC’s discretion
to address problems incrementally.
2. FTC’s Reliance on Its Expertise As Basis for Promulgating Rule is Not
Improper
The FTC supported its promulgation of the Final Rule citing the following three factual
sources: (1) the agency’s expertise, informed by years of administering the HSR Act, 78 Fed.
Reg. at 68,708–09; JA at 10; (2) 66 HSR filings related to patent rights transfers occurring in the
pharmaceutical industry, with no comparable filings in other industries, 78 Fed. Reg. at 68,708;
JA at 10; and (3) informal requests for interpretation from practitioners in the pharmaceutical
industry that are available in the PNO’s searchable, online database, 78 Fed. Reg. at 68,706; JA
at 8. PhRMA contends that the FTC’s analysis cannot be rational where the agency relies on its
own experience, arguing that the FTC must produce physical records that have informed the
agency’s expertise, such as the informal requests for interpretation and any records of phone
calls the PNO received related to patent rights transfers. See Pl.’s Reply at 22. In addition,
PhRMA asserts that the FTC should have undertaken an independent investigation to elicit facts
in support of its rule. Pl.’s Mem. at 24. While PhRMA’s suggestion about an independent
investigation may be a good—and even a preferable—factual basis for promulgation of a rule,
this does not necessarily mean that the FTC’s three sources are insufficient.
First, agencies may rely on their experience in administering statutes and promulgating
54
regulations so long as the agency identifies this and there is “an adequate opportunity to
respond.” See Nat’l Classification Comm. v. United States, 779 F.2d 687, 695 (D.C. Cir. 1985)
(“It is beyond dispute that an agency may provide the factual predicate for a finding by taking
‘official notice’ of matters of common knowledge . . . and of matters known to the agency
through its cumulative experience and consequent expertise” if there was “adequate opportunity
to respond” (citations omitted)); Nat’l Tour Brokers Ass’n v. ICC, 671 F.2d 528, 533 (D.C. Cir.
1982) (finding that agency’s rule was “not an unreasoned decision” because it “was based on the
[agency’s] long experience administering the existing licensing rules and its consequential
dissatisfaction with those procedures”); Thomas v. Lujan, 791 F. Supp. 321, 322–23 (D.D.C.
1992), aff’d, No. 92-5240, 1993 WL 32329 (D.C. Cir. Jan. 29, 1993) (“[T]he Court finds that the
agency’s own expertise, as well as the data presented to the agency during the course of the
rulemaking, justify the storage regulation.”) (internal citation omitted); Black Citizens for a Fair
Media v. FCC, 719 F.2d 407, 422 (D.C. Cir. 1983) (finding that proposed rulemaking justifying
rule change based on agency’s experience was not arbitrary and capricious); see also Nat’l Ass’n
of Pharm. Mfrs. v. Dep’t of Health & Human Servs., 586 F. Supp. 740, 756 (S.D.N.Y. 1984)
(finding that inclusion of “raw documents reflecting the [agency’s] day-to-day enforcement and
compliance activities” in inspection reports was unnecessary for effective judicial review where
the comments were open to public inspection and Freedom of Information Act requests and the
agency “carefully reviewed the comments received and explained [the] basis for adopting the
final version of the regulations”).
PhRMA relies on Coburn v. McHugh, 679 F.3d 924, 926 (D.C. Cir. 2012), and Tripoli
Rocketry Ass’n, Inc. v. Bureau of Alcohol, Tobacco, Firearms, & Explosives, 437 F.3d 75, 77
55
(D.C. Cir. 2006), for the proposition that an agency’s invocation of its own expertise or
experience is owed no deference when founded upon “unsupported assertions.” Pl.’s Mem. at
23–24. Tripoli, which the Coburn opinion cites for this proposition, is distinguishable from the
instant case. In Tripoli, the agency designated a material as “deflagrating”14 without articulating
the standard used by the agency “for determining when a particular material deflagrates.” Id. at
83–84. The Court found that the agency’s definition of a deflagration reaction as “much faster”
than the reaction of burning material was insufficient because “[t]he agency never defined the
threshold for ‘much faster,’” and was thus not entitled to judicial deference because the agency’s
judgment was not reasoned. 437 F.3d at 79, 83. By contrast, in the instant case, the FTC’s
expertise is not being invoked to justify reaching a decision that is otherwise objectively or
scientifically determinable. Rather, the FTC has relied on its expertise to justify promulgating a
rule that is “necessary and appropriate.” The determination of whether a rule is “necessary and
appropriate” in the FTC’s view necessarily relies on the agency’s expertise, informed by years of
administering the premerger notification program, which differs from Tripoli, where the
determination at issue was the agency’s definition of a chemical reaction.15
14
Deflagration is a rapid, sharp combustion, which term the Bureau of Alcohol, Tobacco, Firearms and Explosives
uses to classify explosives under the Organized Crime Control Act. Tripoli Rocketry Ass’n Inc., 437 F.3d at 332–33.
15
PhRMA relies on three additional cases to support its contention that the FTC’s experience is an insufficient basis
to support its Final Rule under the APA. See Pl.’s Mem. at 23–29. All three cases are distinguishable. PhRMA
cites Am. Mining Cong. v. EPA, 907 F.2d 1179, 1189 (D.C. Cir. 1990), but that case is inapposite because there, as
in Tripoli, the agency supplied a summary statement to support a determination—whether “discarded” materials
constituted “solid wastes”—that was best supported through reasoned technical or scientific evidence. Id. at 1188–
89. PhRMA also cites for support Am. Equity Inv. Life Ins. Co. v. SEC, 613 F.3d 166, 177 (D.C. Cir. 2009), which
is distinguishable because the Court there determined that the agency had only made a general determination that
any rule, no matter the substance, was necessary to provide clarity in a previously unregulated area, but did not
provide reasoning to support the agency’s decision to adopt the specific rule at issue. Id. Here, as previously
discussed, the FTC has articulated the need for promulgation of the Final Rule. Third, Morall v. DEA, 412 F.3d 165,
167 (D.C. Cir. 2005), is distinguishable because in that case the Court found that the agency’s lapse of “reasonable
and fair decisionmaking” stemmed from the agency’s “stunningly one-sided” rationale, which “completely
ignore[d]” and “fail[ed] to acknowledge” contrary evidence. By contrast here, as discussed infra, Part III.B.3, the
56
Nor is the FTC required to produce physical records of everything that has contributed to
its expertise over time, as PhRMA contends. Indeed, the Supreme Court has said as much in
NLRB v. Seven-Up Bottling Co. of Miami, 344 U.S. 344, 349 (1953). At issue in that case was an
employer’s challenge of a decision by the National Labor Relations Board (“NLRB”) to award
back pay to eleven discriminatorily discharged employees based on their earnings per quarter,
rather than calculating their back pay based on the “entire period during which an employee was
denied reemployment in violation of the Act.” Id. at 346–48. The employer argued that the
NLRB ordered quarterly payments based on a formulation it had adopted in a prior adjudication,
but that “no evidence in this record supports this back pay order; . . . and the reasons [the NLRB]
assigned for adopting [the formulation] do not rest on data which [it] has derived in the course of
the proceedings before” the NLRB in that case. Id. at 348–49 (emphasis added). The Supreme
Court found that the agency could rely on its cumulative experience (as it did in the earlier
adjudication and the adjudication at issue in the suit) and was “not confined to the record of a
particular proceeding.” Id. at 349. The Court found that, “[a]s is true of many comparable
judgments by those who are steeped in the actual workings of these specialized matters, the
Board’s conclusions may ‘express an intuition of experience which outruns analysis . . . .’” Id. at
348 (citing Chicago, Burlington & Quincy R. Co. v. Babcock, 204 U.S. 585, 598 (1907)). The
Court noted that “[i]t is not for us to . . . require the Board to make a quantitative appraisal of the
relevant factors, assuming the unlikely, that such an appraisal is feasible,” id., recognizing that
“‘[c]umulative experience’ begets understanding and insight by which judgments not objectively
demonstrable are validated or qualified or invalidated,” id. at 348–49. As the Supreme Court
FTC cited to, discussed, and adopted a reasoned basis rejecting the contrary evidence raised in PhRMA’s objections
to the NPRM.
57
made clear in that case, often agency experience is not quantifiable. Agency decisions are not
made by “a particular judge-like individual or group of individuals,” but often stem from
“[p]iecemeal decisions . . . [made] over time, across the desks of numerous members of agency
staff” that “gradually accumulate.” PETER L. STRAUSS, ADMINISTRATIVE JUSTICE IN THE UNITED
STATES 231 (2d ed. 2002). In some cases, as the Supreme Court recognized, it is “unlikely[] that
such an appraisal [of agency experience] is feasible,” Seven-Up Bottling Co. of Miami, 344 U.S.
at 348, because quantifying an agency’s “many unnamed and tangled impressions,” id., is
difficult when multiple agency staff members, over the course of years, “bring to bear whatever
they learn” and “[m]uch that has been relied upon [to make a decision] will not have been
collected,” STRAUSS, supra, at 231. Consequently, “[t]o speak of a ‘record’ in this context . . . is
highly artificial.” Id. In the instant case, for example, PhRMA asserts that the FTC’s decision is
arbitrary and capricious because it has not supported its experience with documentation,
suggesting that the FTC must provide, inter alia, a record of “the ‘thousands’ of calls the PNO
staff fields every year, what topics were discussed, with whom, and for what purpose,” so that
PhRMA may test the basis for the FTC’s expertise. Pl’s Reply at 22. Placing such a requirement
on the FTC would be unwieldy, particularly where there is no indication that the FTC transcribes
or records the many calls it receives at all, much less that it does so in the manner the FTC
desires.
Moreover, the agency is not required, as PhRMA asserts, to undergo an independent
investigation in search of evidence to support its rationale for the Final Rule. The D.C. Circuit
addressed this issue in National Tour Brokers Association, 671 F.2d at 533. In that case, the
plaintiff challenged as arbitrary and capricious the ICC’s decision to change tour broker
58
licensing procedures on the basis that “the administrative record [was] devoid of evidence
supporting the decision to alter existing procedures” because the ICC did not undertake a study
of the tour broker industry that would have elicited all the relevant factors. Id. The Circuit
concluded that although the record was “devoid” of a systematic study, the decision was not
“unreasoned” but was “based on the Commission’s long experience administering the existing
licensing rules.” Id. The Circuit concluded that where the agency had “fully explained its
perception that existing rules . . . are without substantial value” and do not contribute to
achieving the goals of the relevant statute, such “explanation of its experience provide[d]
sufficient support under the arbitrary and capricious standard to sustain the rule change as a
rational decision,” and therefore the agency was not required to further supplement its finding
with additional investigatory evidence. Id. The Circuit found that the agency’s experience was
“made part of the record and susceptible to judicial review” by virtue of the agency’s
explanation, and was therefore sufficiently reasoned. Id. While PhRMA’s frustration with the
nature of the record support for the FTC’s Final Rule is palpable, there are practical limitations
on the extent to which any agency’s experience may be compiled on paper. In this context, the
FTC may rely on its own experience without providing documentation or statistics showing “the
nature, extent, or other particulars” of their experience or “how, under what circumstances, and
under the tutelage of which individuals that alleged ‘experience’ may have been derived.” Pl.’s
Reply at 23.16
Second, with respect to the 66 HSR filings the FTC cited in support of its Final Rule, it is
likely that the FTC could not have provided PhRMA or the general public these documents to
16
Although the FTC permissibly relied on its experience, as discussed below, the FTC did not rest solely on its own
experience but further supported the Final Rule with additional information: HSR filings and requests for
information.
59
facilitate comment on the NPRM because HSR filings are confidential. Under the HSR Act,
“[a]ny information or documentary material filed . . . pursuant to this section shall be exempt
from disclosure . . . and no such information or documentary material may be made public,
except as may be relevant to any administrative or judicial action or proceeding.” 15 U.S.C. §
18a(h). Although this little-analyzed provision contains an “exception” for “any administrative
or judicial action or proceeding,” no court has broached the question of whether HSR filings may
be disclosed when the HSR filing itself is not the subject of an “administrative or judicial action
or proceeding,” but is tangentially related to a separate proceeding. Indeed, few courts have
interpreted this provision of the HSR Act at all. The two cardinal cases discussing § 18a(h),
issued by the Fifth and Second Circuits, have interpreted this provision in the context of
disclosing HSR filings to state law enforcement officials, and both Circuits concluded that the
FTC shall not disclose the information, even on a “confidential” basis. See Mattox, 752 F.2d at
122; Lieberman v. FTC, 771 F.2d 32, 38 (2d Cir. 1985). The Fifth Circuit in Mattox examined
the “skimpy” legislative history behind this provision, and concluded that Congress “was
concern[ed] over the disclosure of materials . . . [and] may have been worried that such
disclosures would be a disincentive to prompt and complete compliance with the premerger
notification procedures by potential merger partners.” Mattox, 752 F.2d at 122–23. The Second
Circuit similarly concluded in Lieberman that “Congress wanted premerger information kept
confidential.” 771 F.2d at 38. The Mattox and Lieberman courts’ analyses suggest that the FTC
may not disclose the HSR filings for public comment where they are merely referenced in a
rulemaking.
Even if disclosure is not prohibited by the HSR Act itself, as the FTC has noted in an
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agency adjudication, given the confidential information contained in HSR filings, other
provisions of law may prevent the FTC from making HSR filings publicly available. See In the
Matter of Gen. Motors Corp., 103 F.T.C. 58, at *3 (1984). In this agency adjudication, the FTC
denied a petition by Chrysler Corporation to release documents that had informed the FTC’s
decision to accept a consent agreement permitting a joint venture by General Motors Corporation
(“GM”) and Toyota Corporation. Id. at *1. Chrysler argued that the FTC improperly redacted or
withheld key documents from public commenters during the comment period preceding the
FTC’s approval of the GM-Toyota joint venture, even though the “judicial or administrative
proceeding” exception under § 18a(h) applied, and the FTC was permitted to disclose the
underlying filings for public comment. Id. at *1–2. The FTC found that although a public
comment period on a proposed consent agreement “constitutes an administrative action or
proceeding,” id. at *6, the FTC “has historically refrained from making public in consent order
proceedings any trade secrets or confidential commercial or financial information obtained from
any person,” id. at *5, because the HSR Act’s exception does not override “other legal bars to
disclosure,” such as “in discovery rules (FED. R. CIV. P. 26(c)(7)), statutes (e.g., Sections 6(f) and
21(d)(1)(B) of the FTC Act and 18 U.S.C. 1905); the Freedom of Information Act, 5 U.S.C.
552(b)(4); and the common law (Restatement of Torts Section 759),” id. at *3.
In the instant case, although the parties have not addressed whether the 66 HSR filings
the FTC relied on could have been disclosed for public comment given § 18a(h)’s exemption
from disclosure, it is apparent that, in light of the sensitive trade information contained in HSR
filings, and given longstanding FTC practice keeping similar information confidential, the FTC
likely is unable to share these filings with PhRMA. Notably, PhRMA does not contest that the
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66 HSR filings reporting exclusive patent rights transfers in the pharmaceutical industry
comprise the sum total of all such filings, not does PhRMA contend that the FTC has
manipulated or misread such information. See generally Pl.’s Mem. As noted, although PhRMA
would ideally wish to access these records to provide more robust comments on the FTC’s
proposed rule, the FTC is limited in the amount of information it may provide for the public’s
review.
Third, with respect to the requests for interpretation submitted to the PNO, 78 Fed. Reg.
at 68,708; JA at 10, PhRMA contends that the agency should have provided these requests for
public comment, arguing that it is otherwise unable to test the FTC’s determinations based on
these requests. Pl.’s. Reply at 19. The informal interpretations the PNO produces in response to
requests for interpretation from practitioners are publicly available and searchable on the FTC’s
website. Def.’s Mem. at 27; 77 Fed. Reg. at 50,059; JA at 3. Indeed, PhRMA cited to an
informal interpretation in its comment to the NPRM. See PhRMA Comment at 11 & n.48; JA at
32 & n.48 (citing to a PNO Informal Staff Opinion and including a link to the FTC database in
footnote 48). As the D.C. Circuit has noted, “[i]n some instances, ‘publicly available’
information . . . may be so obviously relevant that requiring it be specifically noticed and
included in the rulemaking record would advance none of the goals of the APA, such as
improving the quality of the information used by the agency, ensuring fairness to affected
parties, or enhancing the quality of judicial review.” Chamber of Commerce of U.S. v. SEC, 443
F.3d 890, 906 (D.C. Cir. 2006) (internal citations omitted). Moreover, “the public availability of
such information might fall into an implied exception to the general requirement that extra-
record data critical to support a legislative rule be subject to public comment.” Id. (citation
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omitted); see also U.S. Lines, Inc. v. Fed. Mar. Comm’n, 584 F.2d 519, 533–35 (D.C. Cir. 1978)
(collecting cases) (holding that an agency may “rely on data in its files, or on public information,
in reaching its decision . . . [so long as it] specif[ies] what is involved in sufficient detail to allow
for meaningful adversarial comment and judicial review.”). An agency “may rely on publicly
available information so long as it is referenced, thereby enabling ‘meaningful adversarial
comment and judicial review;’ such material need not be directly introduced into the record. A
footnote is enough.” See Wis. Power & Light Co. v. FERC, 363 F.3d 453, 462–63 (D.C. Cir.
2004) (citing U.S. Lines, Inc., 584 F.2d at 534–35 & 534 n.44).
PhRMA cites Chamber of Commerce of U.S. v. SEC, 443 F.3d at 906, for the proposition
that reliance on publicly available documents not in the rulemaking record results in prejudice to
the affected party. See Pl.’s Reply at 20. This case is distinguishable. In Chamber of Commerce
of U.S., the agency’s Final Rule relied on an “extra-record summary of extra-record survey data”
that the agency did not warn commenters it would review in the notice of proposed rulemaking,
and the data was not of the sort “relied upon by the [agency] during the normal course of its
official business.” Id. at 895, 904–05. By contrast, in the instant case, commenters were
apprised that the FTC was relying on the PNO’s public informal interpretation database to
support the NPRM. See 77 Fed. Reg. at 50,059; JA at 3. Thus, reliance on this evidence in the
Final Rule came as no surprise to PhRMA, which cited to the database in its comment to the
NPRM. See JA at 32. In the NPRM, the FTC stated that “[w]hile each situation in the database
is factually unique, the questions from practitioners overwhelmingly focus on exclusive licenses
in the pharmaceutical industry where the licensor grants some rights but retains others. In those
situations, PNO staff was asked to analyze the retained rights to determine if an asset acquisition
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was taking place.” 77 Fed. Reg. at 50,059; AR at 3.17 By so doing, the NPRM alerted
commenters that the FTC relied on requests for interpretation to inform the proposed rule and
PhRMA used the public database as a resource in its comment providing thorough, substantive
comments critiquing the proposed rule. Consequently, although the FTC did not collect the
requests for information and provide them for PhRMA’s inspection, the agency permissibly
relied on this information because it allowed PhRMA an opportunity “for meaningful adversarial
comment.” See Wisconsin Power & Light Co., 363 F.3d at 462–63 (citing U.S. Lines, Inc., 584
F.2d at 534–35 & 534 n.44).
Consequently, the Final Rule is not arbitrary and capricious because the FTC relied on its
expertise, HSR filings, and publicly available data in support of its Final Rule.
3. Objections Raised During the Comment Period Were Addressed
PhRMA contends that the FTC “disregard[ed]” the record evidence and “fail[ed] to offer
a meaningful response to” the Varner Declaration or the purported “substantial problem” raised
in the declaration, namely, that similar transactions occur in other industries not similarly
covered by the Final Rule. Pl.’s Mem. at 25–26. The Court disagrees. First, the FTC did
consider the evidence in the record. The Final Rule mentions PhRMA’s comment twenty-three
times and engages in multi-paragraph discussions of each of the three separate objections raised
in that comment as supported by the Varner Declaration. See generally 78 Fed. Reg. at 68,705;
see also supra Part I.B.2.d; cf. Ass’n of Private Sector Colls. & Univs. v. Duncan, 681 F.3d 427,
441, 449 (D.C. Cir. 2012) (holding that agency action failed to address commenters’ concerns
17
The parties dispute whether the requests for information made available on the FTC’s public database are
complete. Pl.’s Reply at 21–22; Def.’s Reply at 8. The Court need not delve into a comparison of the search terms
used and the documents retrieved by PhRMA and the FTC because, as noted, the agency’s reliance on its expertise
and the 66 HSR filings, which the FTC cannot produce for public inspection, provide sufficient support for the Final
Rule.
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where agency “grouped together related comments” and “address[ed] them in a conclusory
manner” (internal quotation marks and citation omitted)). For example, the Final Rule noted the
objection raised by PhRMA that the pharmaceutical incentives, market structure, and regulatory
hurdles appearing in the pharmaceutical industry also appear in other industries, and gave a
reasoned explanation as to why the FTC disagreed with such claim and would not alter its
proposed rule on this basis. 78 Fed. Reg. at 68,708–09; JA at 10–11; see also 78 Fed. Reg. at
68,706; JA at 8 (adopting the Final Rule “as proposed”). The FTC stated that PhRMA’s
objection was distinguishable because the FTC was not justifying its decision on the basis of “the
uniqueness of the incentives” in the pharmaceutical industry, but was only using this to “help
explain” why transferring exclusive patent rights in the pharmaceutical industry “takes the form
of an exclusive license instead of an outright sale.” 78 Fed. Reg. at 68,708–09; JA at 10–11.
The FTC also noted PhRMA’s concern that the FTC was basing its restriction of the rule to the
pharmaceutical industry on the assumption that manufacturing is less important than the right to
commercialize in this industry, as compared to others. 78 Fed. Reg. at 68,708; JA at 10. The
FTC reiterated in the Final Rule that the statement about manufacturing rights in the NPRM did
not form the basis of its decision but was only described 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.” Id.
Second, with respect to the “substantial problem” raised by the Varner Declaration, the
Final Rule recognized “that there are agreements in other industries that involve the retention of
manufacturing rights,” and, in fact, cited examples provided in the Varner Declaration. 78 Fed.
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Reg. at 68,708 & n.19; JA at 10 & n.19 (citing Varner Decl. at 9–11). The FTC explained,
however, its view that these “are exclusive distribution agreements, which convey to the licenses
only the exclusive rights to distribute the patented product . . . [and] the licensor retains not just
the right to manufacture but all commercially significant rights to the patent,” which was not the
type of transaction the FTC sought to regulate. 78 Fed. Reg. at 68,708 & n.16; JA at 10 & n.16
(citing Varner Decl. at 11–14); see also 78 Fed. Reg. at 68,709; JA at 11 (PhRMA’s comment
“has not identified any other industry in which exclusive patent licenses, as opposed to exclusive
distribution agreements, are common”). The Final Rule acknowledged that “[a]lthough it is
possible for other industries to engage in the kind of exclusive licensing that typifies the
pharmaceutical industry, the PNO has not processed” or even seen such filings in other industries
in the past five years. 78 Fed. Reg. at 68,708; JA at 10.
The FTC also justified promulgation of an industry-specific rule on separate grounds, that
the FTC intended to “proceed incrementally” and to implement the rule where the FTC believed
it was necessary. 78 Fed. Reg. at 68,709–10; JA at 11–12. The FTC explained that even if such
transactions exist in other industries, the FTC has not encountered these and therefore the FTC
“has not found a need for a rule applicable to other industries.” 78 Fed. Reg. at 68,708; JA at 10.
Given that the FTC’s grant of authority under the HSR Act is to promulgate rules “as may be
necessary and appropriate to carry out the purposes of this section,” 15 U.S.C. § 18a(d)(2)(C)
(emphasis added), applying such a rule across industries where there is no demonstrated need to
do so might have rendered such rule vulnerable to a separate challenge that the FTC had
exceeded its statutory authority on these grounds. See, e.g., Am. Petroleum Inst., 953 F. Supp. 2d
at 20–23 (holding that agency’s rule of general applicability across companies was “arbitrary and
66
capricious” for failing to provide for exemptions). Consequently, the FTC understandably
decided to “limit [the Final Rule] to those areas where [the FTC has] observed a problem to be
addressed.” 78 Fed. Reg. at 68,709; JA at 11; see also City of Las Vegas v. Lujan, 891 F.2d 927,
935 (D.C. Cir. 1989) (explaining that “[s]ince agencies have great discretion to treat a problem
partially, we [sh]ould not strike down [a regulation] if it [is] a first step toward a complete
solution.”); Nat’l Ass’n of Broadcasters, 740 F.2d at 1210–11; Inv. Co. Inst. v. U.S. Commodity
Futures Trading Comm’n, 891 F. Supp. 2d 162, 187–88 (D.D.C. 2012), as amended (Jan. 2,
2013), aff’d sub nom. Inv. Co. Inst. v. Commodity Futures Trading Comm’n, 720 F.3d 370 (D.C.
Cir. 2013) (“[I]n promulgating regulations, agencies may proceed incrementally . . . .”). This
discussion, which summarized and distinguished the Varner Declaration, demonstrates that the
FTC considered the points raised in the Varner Declaration and simply arrived at a different
conclusion. This does not, as PhRMA asserts, demonstrate that the FTC “entirely failed to
consider an important aspect of the problem, [or] offered an explanation for its decision that runs
counter to the evidence before the agency.” Am. Wildlands, 530 F.3d at 997–98 (quoting State
Farm, 463 U.S. at 43).
An agency’s duty to respond to “significant comments raised during the rulemaking . . . is
not ‘particularly demanding.’” Ass’n of Private Sector Colls. & Univs., 681 F.3d at 441 (citing
PPL Wallingford Energy LLC v. FERC, 419 F.3d 1194, 1198 (D.C. Cir. 2005)). Moreover, “the
arbitrary and capricious standard is ‘highly deferential’ and ‘presumes agency action to be
valid.’” Am. Trucking Ass’ns., Inc., 724 F.3d at 245 (quoting Am. Wildlands, 530 F.3d at 997–
98); Envtl. Def. Fund, Inc., 657 F.2d at 283. The Court must “look only for ‘a rational
connection between the facts found and the choice made.’” Am. Trucking Ass’ns., Inc., 724 F.3d
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at 245 (quoting State Farm, 463 U.S. at 43). In light of the FTC’s explanation of its rule and its
response to PhRMA’s comments, the Court finds that the FTC has established such rational
connection.
Accordingly, this Court concludes that the Final Rule promulgated by the FTC is not
arbitrary and capricious.
C. FTC’s Rulemaking Record Included Sufficient Factual Material In Support
of Its Decision
Count III of PhRMA’s complaint claims that the FTC did not observe the procedure
required by law under 5 U.S.C. § 706(2)(D) because the FTC did not include the factual basis for
its decision in the rulemaking record. See Compl. ¶¶ 101–06; Pl.’s Mem. at 29–30. PhRMA
objects that the FTC violated the rulemaking process by failing to provide for public comment
the specific records of the informal interpretation requests and any other information which the
FTC relied on to inform its decision. See Pl.’s Mem. at 30. This argument essentially restates
PhRMA’s contention that the Final Rule is arbitrary and capricious for failing to provide record
support informing its expertise. See supra Part III.B.2. The FTC stated in the Final Rule that the
agency determined the rule was necessary based on informal requests for information and 66
HSR filings received from the pharmaceutical industry, and no other industry, with regards to
exclusive patent rights transfers. 77 Fed. Reg. at 50,059; JA at 3; 78 Fed. Reg. at 68,708; JA at
10.
“The APA requires an agency to publish ‘notice’ of ‘either the terms or substance of the
proposed rule or a description of the subjects and issues involved,’ in order to ‘give interested
persons an opportunity to participate in the rulemaking through submission of written data,
views, or arguments.’” Am. Radio Relay League, Inc. v. FCC, 524 F.3d 227, 236 (D.C. Cir.
68
2008) (citing 5 U.S.C. § 553(b)-(c)). Under the APA, the court shall “hold unlawful and set
aside agency action, findings, and conclusions found to be . . . without observance of procedure
required by law.” 5 U.S.C. § 706(2)(D). “Longstanding precedent instructs that “[n]otice is
sufficient ‘if it affords interested parties a reasonable opportunity to participate in the rulemaking
process,’ and if the parties have not been ‘deprived of the opportunity to present relevant
information by lack of notice that the issue was there.’” Am. Radio Relay League, Inc., 524 F.3d
at 237 (quoting WJG Tel. Co., Inc. v. FCC, 675 F.2d 386, 389 (D.C. Cir. 1982) (citations
omitted)). The Court’s inquiry focuses on whether “the interested parties could not reasonably
have ‘anticipated the final rulemaking from the draft [rule],’” and “whether the notice given
affords ‘exposure to diverse public comment,’ ‘fairness to affected parties,’ and ‘an opportunity
to develop evidence in the record.” Nat’l Mining Ass’n v. Mine Safety & Health Admin., 116
F.3d 520, 530–31 (D.C. Cir. 1997) (internal citations omitted).
The Final Rule was adopted as proposed, and interested parties were apprised of the
basis and rationale for the FTC’s proposed rule in the NPRM and provided an opportunity to
comment. As previously discussed, with respect to the 66 HSR filings the FTC relied upon, such
information is confidential and likely could not have been made public. See 15 U.S.C. § 18a(h);
see also Mattox, 752 F.2d at 122; Lieberman, 771 F.2d at 38; In the Matter of Gen. Motors
Corp., 103 F.T.C. at *3. The requests for interpretation were available on the PNO’s public
database recording informal requests for interpretation, and PhRMA accessed this database to
support its comment to the proposed rule. See JA at 32; see also Wis. Power & Light Co., 363
F.3d at 462–63 (citing U.S. Lines, Inc., 584 F.2d at 534–35 & 534 n.44). Moreover, PhRMA
representatives met with FTC Commissioners and staff members on four occasions after the
69
close of the comment period and were provided the opportunity to submit additional material for
the FTC’s consideration, providing them ample opportunity to comment on the proposed rule.
See JA at 70–77. As a result, PhRMA was given “the opportunity to present relevant
information” and “a reasonable opportunity to participate in the rulemaking process.” Am. Radio
Relay League, Inc., 524 F.3d at 236 (quoting WJG Tel. Co., Inc., 675 F.2d at 389 (citations and
internal quotation marks omitted)). Consequently, the FTC’s rulemaking process thus did not
fail to observe the procedure required by law under 5 U.S.C. § 706(2)(D).
IV. CONCLUSION
For the aforementioned reasons, PhRMA’s Motion for Summary Judgment is denied and
the FTC’s Motion for Summary Judgment is granted. An appropriate order accompanies this
Memorandum Opinion.
Digitally signed by Hon. Beryl A.
Howell
Date: May 30, 2014 DN: cn=Hon. Beryl A. Howell,
o=District of Columbia, ou=U.S.
District Court for the,
email=Howell_Chambers@dcd.us
courts.gov, c=US
Date: 2014.05.30 20:19:43 -04'00'
__________________________
BERYL A. HOWELL
United States District Judge
70