Tag: hart scott rodino

Failure to Comply with Hart-Scott-Rodino Act Just Got More Expensive

FTC Hart-Scott-Rodino AntitrustLast November, President Obama signed into law an amendment to the Federal Civil Penalties Inflation Adjustment Act (Sec. 701 of Public Law 114-74). The amendment requires federal agencies to adjust the maximum civil penalties for violations of the laws they enforce no later than July 1, 2016.

On June 29, 2016, the Federal Trade Commission revised its Rule 1.98 to reflect the new higher levels for maximum civil penalties. The new maximums will apply to civil penalties assessed by the FTC after August 1, 2016. They include civil penalties for violations that occurred prior to the effective date. (Going forward, the maximums will be adjusted for inflation each January.)

Of particular significance to corporations that acquire, sell, or merge with other businesses, the penalties for violating the premerger reporting and waiting requirements under the Hart-Scott-Rodino Act have been increased from $16,000 per day to $40,000 per day, an increase of 150%.

As most businesspersons know, under the HSR Act, the parties to mergers and acquisitions that meet the dollar thresholds of the Act and are not otherwise exempt must file a premerger notification form, pay the appropriate fees, and wait 30 days (or possibly more) prior to closing the transaction. Failure to file the required notification or to observe the mandatory waiting period will subject the parties to civil penalties, which are now significantly higher.

Note that for continuing violations of the HSR Act, each day is a separate violation. As a result, the maximum civil penalty may be multiplied by the number of days for each violation of the applicable statute or order. (For example, a company or individual that is required to report but fails to do so for one year would be facing a fine of up to $14.6 million under the new levels.)

But statutory maximums are not automatically imposed. Before levying a civil fine, the Commission considers various factors in determining whether the maximum should be mitigated. Those factors include:

  1. Harm to the public

  2. Benefit to the violator

  3. Good or bad faith of the violator

  4. The violator’s ability to pay

  5. Deterrence of future violations by this violator and others

  6. Vindication of the FTC’s authority

Why does it happen that a company or individual fails to make the required HSR filing? The FTC reports that it frequently sees two specific scenarios:

  1. Company executives who acquire company voting shares through exercising options or warrants may fail to aggregate the value of such shares with the value of the company shares they already hold and therefore do not realize that they have satisfied the HSR size of transaction threshold test.

  2. Sometimes companies or individuals who have qualified for the “investment-only” exemption in the past may erroneously continue to rely on that exemption even though they have become active investors in the company or their holdings in the company have increased above 10%.

Other recurring scenarios can also trip up acquirers. For example, companies may not realize that patent and other IP licenses are in certain circumstances treated as the acquisition of an asset for HSR Act purposes.

ARTICLE BY William M. Hannay of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

FTC Proposes Amendments to HSR Rules Targeting Certain Pharmaceutical Licensing Arrangements

The National Law Review recently published an article by Robert G. Kidwell and Farrah Short of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding Pharmaceutical Licensing:

 

The Federal Trade Commission (FTC) recently announced proposed amendments to the Premerger Notification Rules (HSR Rules) to clarify reporting requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act), for transactions involving the transfer of patent rights in the pharmaceutical industry. The proposed rule is largely a codification of the FTC’s current treatment of exclusive licenses, with one significant change regarding the weight given to manufacturing rights retained by the licensor in pharmaceutical transactions.

The HSR Act requires parties engaged in certain transactions (involving the acquisition of voting securities, assets, or controlling non-corporate interests) to file a notification with the FTC and the Antitrust Division of the Department of Justice (DOJ), and to observe the statutorily prescribed waiting period prior to closing. Theacquisition of a patent is treated as an asset acquisition, and thus a potentially reportable transaction under the HSR Act. However, whether the transfer of rightsto a patent is also deemed an asset acquisition commonly involves a complex analysis focused on whether the transferred rights grant the licensee theexclusive right to “make, use and sell.”

Commercially Significant Rights

The proposed amendments would codify the reporting requirement under the HSR Act for any transaction within the pharmaceutical industry that involves the transfer of “all commercially significant rights.” These rights are defined as the exclusive patent rights to use the patent in a particular therapeutic area or in a specific indication within a therapeutic area.

The FTC has defined the pharmaceutical industry for purposes of this amendment by specifying NAICS (North American Industry Classification System) code 3254, which includes medical and botanical manufacturing, pharmaceutical preparation manufacturing, in-vitro diagnostic substance manufacturing, and biological product manufacturing. Importantly, the FTC’s proposed amendments are limited to the pharmaceutical industry and do not change the current HSR Act reporting requirements related to exclusive licenses in other industries.

Retained Manufacturing Rights

Under current FTC practice, transactions where the licensor retains the right tomanufacture are generally deemed non-exclusive and thus non-reportable under the HSR Act, even if the licensee obtains exclusive rights to use and sell under the patent. These transactions historically have been viewed as distribution agreements, rather than asset acquisitions.

The FTC, however, has determined that the right to manufacture in pharmaceutical licensing arrangements is far less important than the right to commercialize (use and sell) the product. Therefore, the FTC’s proposed amendment treats these types of exclusive arrangements in the pharmaceutical industry — where the licensee obtains the exclusive right to use and sell but the licensor retains the right to manufacture — as the transfer of “all commercially significant rights” and thus potentially reportable under the HSR Act. This change would represent a significant departure from the FTC’s current practice.

Retained “Co-Rights”

In certain licensing arrangements, the licensor often retains “co-rights” when granting an otherwise exclusive license. For example, in the pharmaceutical industry, co-rights provide for the shared responsibility between the licensor and the licensee to see the licensed product through the Food and Drug Administration (FDA) approval process, and the subsequent marketing and promotion of the product (often referred to as “co-development” and “co-marketing” rights). Under current FTC practice, the retention of these co-rights by the licensor does not render the license non-exclusive, therefore they remain potentially reportable licensing arrangements under the HSR Act. The proposed amendments would simply codify this approach without making any change to current practice.

The proposed amendments would modify the HSR Rules contained in 16 C.F.R. §801.1 and §801.2. Click here for the text of the Federal Register Notice, and the full language of the proposed amendments. Comments regarding the proposed amendment must be submitted to the FTC by October 25, 2012.

©1994-2012 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.