Category: Administrative & Regulatory

Imperfect Fit: Abercrombie Store Threatens Location In Tailored-Clothing Mecca Savile Row

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We’ve all heard the various means of describing the inappropriate place for an otherwise benign thing, rendering the otherwise benign thing a hazard or a liability or just plain offensive.  In 1855, the author Robert De Valcourt referred to, “An awkward man in society is like a bull in a china shop, always doing mischief.”  Robert De Valcourt, The Illustrated Manners Book: A Manual of Good Behavior and Polite Accomplishments (1855).  In 1926, Justice Sutherland opined, “A nuisance may be merely a right thing in the wrong place — like a pig in the parlor instead of the barnyard.”  Village of Euclid v. Ambler Realty Co., 272 U.S. 365 (1926).

Village of Euclid, of course, upheld the constitutionality of the zoning concept, a replacement of single purposes ordinances and private litigation for land use management.  See David Owens, Land Use Law In North Carolina (2d ed. 2011).

bull china shop retail real estate land use

“Late Ming dynasty, kaolin and pottery stone foundation, cobalt firing enamelling with Arabic lettering.  If only I could find a well-tailored suit and some skinny jeans to go with this vase.” 

Well, the “pig” or the “bull” in one particular instance is anticipated to be an Abercrombie and Fitch children’s store in the heart of London.

The “china shop” or the “parlor”?  Well, that may be Savile Row, legendary collection of fine British tailors and suitmaker to the rich and famous.  Consider this quote from Mark Henderson, chairman of “heritage tailor Gieves & Hawkes”, reported by CNBC about objection to the Abercrombie store:

“Opening a kids store on Savile Row is a somewhat bizarre thing to do. It’s a fairly narrow street, it’s got its own atmosphere to it.  It’s just fundamentally a mistake from Abercrombie – they don’t get everything right.”

We don’t purport to know the land use laws in London, we’ll leave that to the Ealing Common Land Use Barrister blog, but it’s always interesting to see just how common and universal land use issues can be.

It’s also interesting to see how different motives underpin all land use issues.  For example, one might assume the “hubub” over the Abercrombie store is a degradation of the historical nature of the narrow street, as Mr. Henderson alludes.  Well, maybe the distaste is different for another, even another from a seemingly similar perspective.  Consider this worry about “higher rents”, from John Hitchcock of “bespoke tailor Anderson & Sheppard” (man, I love the British):

“One or two of the tailors are concerned it might put the rents up, and it will do, I suppose.  There’s only so much rent we can pay. Our costs are already high as we make every suit by hand – unlike the big chains which don’t make their products on the premises.”

The Lesson of the Day

Land use decisions are nuanced legally but they are also very nuanced politically.  In this one space, one street within one small universe of British tailors, we have two very distinct motives for refusing the Abercrombie store.  Yes, both are opposed to the store, but each is opposed for a different reason, which means a political salve must address, at least, two distinct concerns.

One must fully and fairly understand the forces against which one is working, before success is at hand.  I think Sun Tzu, the Zhou Dynasty Land Use Litigator, said that.

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Mexico: U.S. Natural Gas Savior?

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Much has been made of the exponential growth in natural gas supply within the continental United States due to the horizontal drilling and fracking techniques employed in recent years. The resulting natural gas glut has reversed the conventional wisdom that America would be a net importer of natural gas for most of the 21st century with the expectation now being that America, despite being by far the world’s largest consumer of hydrocarbons, will be a significant exporter of natural gas overseas in the coming years and decades. This development has resulted in a flurry of proposed liquefied natural gas (“LNG”) terminals that hope to export natural gas in order to take advantage of the large spreads between prices in America and those in Europe and Asia. Those price spreads exist because a worldwide market for natural gas doesn’t exist, as opposed to oil where the relatively short-lived Brent-WTI price differential has evaporated in recent months.

However, these export terminals cannot export gas to foreign countries lacking a free trade agreement with the U.S. without permits from the U.S. Department of Energy and the Federal Energy Regulatory Commission (“FERC”). The queue for approval is long with only three facilities (including most recently the Lake Charles LNG Project in Lake Charles, Louisiana) receiving approval from the Department of Energy and only one of those (the Sabine Pass project in Cameron Parish, Louisiana) receiving approval from FERC. Given the long construction lead times for these projects and political pressure from environmentalists and buyers of natural gas who want prices to remain low, it won’t be until 2016 when any significant volumes of LNG are exported from the continental United States. Rival producers such as Qatar, Australia and Indonesia are rapidly signing contracts with Japan, Korea and China to satisfy the long-term needs of those countries as America continues to delay the development of its LNG infrastructure.

Meanwhile, the historically low natural gas prices created by the production glut are forcing energy companies to find a profitable market for their natural gas in the short to medium term. They appear to have found one in America’s backyard: Mexico. Constructing pipelines to straddle the U.S.-Mexico border entail less regulatory complexities and attract less political attention than LNG exports. With the existing U.S.-Mexico natural gas pipelines almost at capacity, energy companies cannot build border pipelines fast enough, with several new pipeline projects coming online, including Kinder Morgan’s El Paso Natural Gas Co. export pipeline near El Paso, Texas, with a capacity of 0.37 billion cubic feet per day. According to the U.S. Energy Information Administration all of the in-progress pipeline projects on the U.S.-Mexico border could result in a doubling of American natural gas exports to Mexico by the end of 2014.

This new export market should continue to support U.S. shale development in the near-term and medium-term future, especially in Texas, despite low natural gas prices and continued supply growth. Longer term prospects for U.S. natural gas exports to Mexico are also bright as well. Even though Mexico has large hydrocarbon reserves itself, the 1938 nationalization of its oil industry and the subsequent decades of underinvestment have seen Mexican hydrocarbon production steadily decline in the last decade. The Mexican constitution effectively prohibits private investment in hydrocarbon production and the Mexican public firmly believes in public ownership of hydrocarbons. There is widespread agreement among many Mexican politicians that private capital, especially from U.S. energy companies with the expertise to tap offshore and shale hydrocarbons, is needed to reverse the production decline, but whether public opposition can be overcome remains in doubt. Mexican President Enrique Peña Nieto is pushing constitutional reforms to attract foreign capital, but even if those pass Mexico is years away from converting any private capital into increased production. If those reforms do not pass, Mexico will be forced to continue to look to U.S. natural gas producers to provide it with its growing energy needs.

So while a regulatory bottleneck is endangering America’s ability to be a long-term overseas exporter of natural gas, Mexico, with its growing economy and inability to tap its own reserves, seems poised to play an outsized role in a continued expansion of American natural gas production. LNG exports might be the wave of the future, but natural gas exports to Mexico are the here and now.

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Health Care Reform Update – Week of August 5th, 2013

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Leading the News

Office of Personnel Management Addresses Premiums for Congressional Staffers On August 1st, the U.S. Office of Personnel Management (OPM) announced it will release proposed regulations within the next week to allow the federal government to contribute to the health care premiums of members of Congress and their staffs. Earlier in the week, President Obama said he was working with Congress to address the issue, which had prompted concerns about a brain drain from Capitol Hill. Senator Tom Coburn (R-OK) said he intended to place a hold on Katherine Archuleta, the nominee to be the chief at OPM, until the issue was resolved.

House Energy and Commerce Committee Unanimously Approves SGR Bill On July 31st, by a unanimous 51-0 vote, the House Energy and Commerce passed legislation that would repeal the sustainable growth rate (SGR) Medicare physician payment method and shift payment to quality-based measures.

Implementation of the Affordable Care Act

On July 29th, CMS issued a release that indicates the ACA and its gradual closure of the donut hole coverage gap has saved 6.6 million Americans over $7 million, an average savings of $1,061 per beneficiary.

On July 29th, the White House issued a blog post noting nationwide health care costs grew just 1.1% from May 2012 – May 2013. The 1.1% growth is the slowest in 50 years.

On July 30th, House Republicans released a playbook for the August recess that encourages members to hold “emergency town halls” in response to ACA implementation.August 5, 2013

On July 30th, the CMS released an application that allows organizations to become “Champions for Coverage” under the ACA.

On July 30th, CMS released an application for community health centers and other health providers that want to become certified application counselor organizations and help people searching for insurance coverage on the ACA exchanges.

On July 30th, the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JTC) issued an estimate that the employer mandate delay of the ACA will cost about $12 billion.

On July 31st, HHS issued a request for information from stakeholders regarding section 1557 of the ACA, which prohibits discrimination based on race, color, national origin, sex, age, or disability in health care programs.

On July 31st, the Kaiser Family Foundation (KFF) released a report and interactive map on how insurance coverage would be expanded as a result of the ACA.

On July 31st, House Speaker John Boehner (R-OH) said he is still unsure if House Republicans will use the threat of a government shutdown in an effort to defund the ACA.

On July 30th, EHealthInsurance reached a deal to sell its products on the ACA insurance exchanges. EHealth CEO Gary Lauer says his company’s involvement on the exchanges will lead to increased enrollment and improved competition in the insurance marketplace.

On August 1st, California announced six insurers that will offer coverage on the state’s Small Business Health Options Program (SHOP). A summary of the Covered California plan indicates the premium prices and coverage options for hypothetical business operations.

On August 1st, 38 Republican Senators sent a letter to White House Counsel Kathryn Ruemmler with a request for information on the government agencies involved in ACA implementation.

On August 1st, the House Ways and Means Committee held a hearing on the role of the IRS in ACA implementation. Gary Cohen of the CMS Center for Consumer Information and Insurance Oversight (CCIIO) and Daniel Werfel of the IRS testified before the committee.

On August 1st, the House Energy and Commerce Committee conducted a hearing with CMS Administrator Marilyn Tavenner to discuss the current state of ACA implementation.

On August 2nd, the House voted, 232-185, to prohibit the IRS from being involved in enforcement of the ACA. The vote was the 40th time the House has attempted to repeal components of the ACA.

Other HHS and Federal Regulatory InitiativesAugust 5, 2013

On July 30th, the Department of Justice (DOJ) announced Wyeth Pharmaceuticals agreed to pay over $490 million to resolve criminal and liability issues arising from the company’s unlawful marketing of Rapamune, a drug only approved by the Food and Drug Administration (FDA) for kidney transplants.

On July 31st, CMS issued final payment rules to increase payments to skilled nursing facilities by 1.3%, at a cost of $470 million, and increase payments to inpatient rehabilitation facilities by 2.3%, a $170 million cost.

On August 1st, the FDA released 2014 user fee rates for biosimilars, brand name prescription drugs, generic prescription drugs, and medical devices.

On August 2nd, the FDA issued a rule addressing ‘gluten-free’ food labeling. The rule states foods that claim to be gluten-free but contain more than 20 parts per million of gluten will be considered misbranded products.

On August 2nd, CMS released a final rule relating to payments for acute care and long-term care hospitals in 2014. The rule increases payment to the nation’s 3,400 acute care hospitals by $1.2billion. Payment to 440 long-term care facilities is set to increase $72 million.

Other Congressional and State Initiatives

On July 31st, Rep. Daniel Lipinski (D-IL) introduced legislation to require hospitals to publicly disclose the prices charged for the most common medical procedures.

On August 1st, Democratic Senators sent a letter to President Obama urging the White House to establish set targets for Medicare and Medicaid cost savings.

On August 1st, Senators Mark Warner (D-VA) and Johnny Isakson (R-GA) introduced The Care Planning Act of 2013, a bill to improve palliative care and provide seriously ill patients with greater control of their own care.

On August 2nd, Michigan and Illinois announced a partnership to share Medicaid information systems, a plan expected to save millions of dollars for both states.

On August 2nd, Senators Mike Crapo (R-ID), Ben Cardin (D-MD), and Angus King (I-ME) introduced a bill, S. 1422, to require the CBO to more completely address the cost-savings of preventive healthcare.

Other Health Care News

On July 29th, doctors from the National Cancer Institute published a report suggesting the word ‘cancer’ is overused. The report argues the overuse of the term leads to unnecessary and potentially harmful treatment in many patients.August 5, 2013

On July 29th, Gallup released a poll indicating Americans have exercised less each month in 2013 than during the same months in 2012. About half of Americans say they exercise at least 30 minutes three or more days each week.

On August 2nd, the Institute of Medicine released a report on the efforts needed to tackle obesity in the United States.

Hearings and Mark-Ups Scheduled

The Senate and the House of Representatives are in recess until the week of September 9th.

David Shirbroun also contributed to this article.

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Prospects for Comprehensive Immigration Reform: The House of Representatives Kicks the Can Down the August Recess Road

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The U.S. House of Representatives left town last week for the long August recess without passing one immigration-related bill. House Republicans made it quite clear that the Senate- passed S. 744, The Border Security, Economic Opportunity, and Immigration Modernization Act, would never be taken up by the House.

To date, the House has five immigration bills reported out of either the Judiciary or Homeland Security Committee. The Comprehensive Immigration Reform bill that the House Gang of 8 (now 7) has been working on for the past 18-plus months has not be introduced and the common wisdom is that it will not be the vehicle that will be used in the House.

None of the five bills have been brought to the floor for a vote. When the House returns in September, there is a feeling that the bills might be brought up in the following order:

  1. The Border Security Results Act (H.R. 1417) was introduced on April 9, 2013 by House Homeland Security Chairman Michael McCaul and approved by the House Homeland Security Committee on May 20, 2013 by voice vote. H.R. 1417 requires results verified by metrics to end The Department of Homeland Security’s ad hoc border approach and to help secure our nation’s porous borders.
  2. The Strengthen and Fortify Enforcement Act (H.R. 2278), also know as The SAFE Act, was approved by the House Judiciary Committee on June 18, 2013. The SAFE Act seeks to improve the interior enforcement of our immigration laws by preventing the Executive Branch from unilaterally halting federal enforcement efforts. To this end, the bill grants states and localities the authority to enforce federal immigration laws.
  3. The Legal Workforce Act (H.R. 1772) was introduced on April 26, 2013 by Rep. Lamar Smith and approved by the House Judiciary Committee on June 26, 2013. This bill discourages illegal immigration by ensuring that jobs are made available only to those who are authorized to work in the U.S. Specifically, the bill requires employers to check the work eligibility of all future hires though the E-verify system.
  4. The Supplying Knowledge Based Immigrants and Lifting Levels or STEM Visas Act (H.R. 2131), also known as The SKILLS Visa Act, was introduced by Rep. Darrell Issa on May 23, 2013. The SKILLS Visa Act changes the legal immigration system for higher-skilled immigration and improves programs that make the U.S. economy more competitive. The SKILLS Visa Act was approved by the House Judiciary Committee on June 27, 2013.
  5. On April 26, 2013, House Judiciary Committee Chairman Bob Goodlatte introduced the Agricultural Guestworker Act (H.R. 1773), also known as The AG Act. The Committee approved this bill on June 19, 2013 in a voice vote (20-16). This bill attempts to provide farmers with a new guest worker program to ease access to a lawful, agricultural workforce that employers may call upon when sufficient American labor cannot be found.

The members of the Republican leadership in the House have not been clear about the timing strategy for a potential conference with the Senate. It is not very likely, however, that a conference will occur until the end of 2013, if at all.

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Picture This: The National Labor Relations Board’s Division of Advice Wants to Sue Employer for Issuing Social Media Policy with Photo/Video Ban

Michael Best Logohe National Labor Relations Board’s Division of Advice (the Division) recently recommended that the Board issue a complaint against Giant Foods for implementing its social media policy without first bargaining with two unions, and for maintaining a social media policy that included unlawful provisions. Although the Division analyzed several social media policy provisions, its criticism of two provisions in particular—a ban on using photo and video of company premises, and restrictions on employees’ use of company logos and trademarks—makes it very difficult for employers to protect their brands while at the same time complying with federal labor laws.

Giant Foods’ social media policy forbade employees from using company logos, trademarks, or graphics without prior approval from the company. The policy also prohibited employees from using photographs or video of the “Company’s premises, processes, operations, or products” without prior approval as well.

The Division concluded that these provisions were unlawful under the National Labor Relations Act (NLRA) and that the National Labor Relations Board (the Board) should issue a complaint against Giant Foods for implementing them. As employers are becoming keenly aware, the NLRA safeguards employees’ right to engage in protected concerted activity. Such activity includes group discussions and some comments by individual employees that relate to their wages, hours, and other terms conditions of employment.

The Division concluded that banning employees from using company logos or trademarks was unlawful because: (1) employees should be allowed to use logos and trademarks in online communications, including electronic leaflets or pictures of picket signs with the employer’s logo; and (2) those labor-related interests did not raise the concerns that intellectual property laws were passed to protect, such as a business’ interest in guarding its trademarks from being used by competitors selling inferior products.

Additionally the Division concluded that restricting employees from using photo and video of company premises unlawfully prevented them from sharing information about participation in protected concerted activities, such as snapping a picture of a picket line.

Unfortunately, the Board’s expansive view will likely hamper companies’ ability to prevent damage to their brand and reputation.  Not allowing employers to ban the taking of videos and photos on their premises, or restricting the use of company logos/trademarks could lead to public relations nightmares such as the one Subway Foods recently endured after it was revealed that an employee posted a graphic picture on Instagram of his genitalia on a sub, with the tag line “I will be your sandwich artist today.”

Given the prevalence of cell phones with photo and video capabilities, and the ease of uploading photos and videos to the internet, a company that cannot control its employees’ use of those devices on their premises will be one bad employee decision away from public embarrassment.

What else can be gleaned from the Giant Foods Advice Memorandum? That the Board’s General Counsel will continue to prod employers to eliminate blanket bans on certain kinds of employee conduct from their social media policies and replace those bans with provisions that include specific examples of what employee conduct the policy prohibits. The Board and its General Counsel have previously found social media policies that restricted employee use of confidential information and complaints about an employer’s labor practices as unlawful; Giant Foods makes clear that the agency is also scrutinizing other kinds of policy provisions that potentially could infringe on an employee’s right to engage in protected concerted activities.

Accordingly, employers should review their policies with counsel so that they can tailor them to restrict employee conduct that will damage the company and its brand, but not be “reasonably” read to restrict employees’ rights to engage in protected concerted activities.

It’s Official: Top Union Lawyer To Be National Labor Relations Board (NLRB) General Counsel

Barnes & Thornburg

And you thought Lafe Solomon was anti-employer? Buckle your seat belts folks because the employer community is in for a rough ride.

The White House has confirmed Board member Richard Griffin has been nominated to be the new General Counsel for the NLRB.  Before joining the Board as a “recess” appointee, Griffin served as General Counsel for the International Union of Operating Engineers. Griffin has served on the board of directors for the AFL-CIO Lawyers Coordinating Committee and has held various legal jobs with the IUOE. Griffin holds a B.A. from Yale University and a J.D. from Northeastern University School of Law. With Griffin’s nomination, the President also withdrew the nomination of Lafe Solomon Jr. to be General Counsel.  Solomon had been named Acting General Counsel on June 21, 2010.  His nomination for that job went to the U.S. Senate on January 5, 2011 and again in May of this year, but the nomination was never voted upon.

As we previously reported here and here, Griffin’s nomination for the GC job comes on the heels of the deal crafted in the Senate to allow the President’s nominations for the Board to come to the floor for an up or down vote.  Republicans insisted that the President withdraw the nomination of Griffin and Sharon Block.  He agreed and replaced their nominations with those of Kent Hirozawa and Nancy Schiffer, both reportedly hand-picked by AFL-CIO President Richard Trumka. With the recent confirmation of all five of the nominations, the Board is at its full five-member complement for the first time in more than a decade.  However, with a solid 3 member pro-Union majority and Griffin in the General Counsel’s slot, it will be full speed ahead on President Obama’s pro-Union agenda.

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Private Placement of Alternative Investment Funds in the European Union (EU): Changing Regulatory Landscape

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I. Overview

The European Commission’s Alternative Investment Fund Managers Directive (“AIFMD”) was designed to establish a unified framework throughout the EU for regulating previously unregulated Alternative Investment Funds (“AIF”).

The AIFMD is effective as per July 22, 2013. The AIFMD, as any other EU directive, however needs to be transposed into European Union members’ national laws before it will actually have effect. Moreover, the AIFMD leaves the member states with the flexibility to make their own choices on certain aspects. This concerns also the private placement of units in AIF´s.

In preparation for its enforcement by the individual EU member states, this memorandum will discuss the AIFMD’s effect on non-EU managers of AIFs (“AIFM”) marketing non-EU AIFs within the EU.  The memorandum will first give a broad overview of some of the AIFMD’s measures significant for non-EU AIFMs, followed by a table summarizing how the private placement of AIF´s in the major capital markets of the EU is affected the AIFMD.

It should be noted that prior to July 22, 2013, the marketing of AIF´s in EU member states already required an individual analysis for each member state. For the time being not much has changed in this respect but marketing unregulated funds to selected non retail investors has certainly become more complex due to the AIFMD. Also these distributions may no longer be expected to remain of relatively little interest to securities regulators and fund managers may therefore be required to strengthen their compliance efforts in this area.

II. Regulatory Target – AIF Managers

The AIFMD seeks to regulate a set of previously unregulated AIFs, namely, “all collective investment undertakings that are not regulated under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.”  These include hedge funds, private equity funds, commodity funds, and real estate funds, among others.

Rather than regulating AIFs directly, however, the AIFMD regulates AIFMs—that is, entities providing either risk or portfolio management to an AIF.  According to the AIFMD, each AIF may only have a single entity as its manager.

The AIFMD applies to AIFMs that are: (1) themselves established in the EU (“EU AIFM”); (2) AIFMs that are not established in an EU country (“non-EU AIFM”), but that manage and market AIFs established in the EU (“EU AIF”); or (3) non-EU AIFMs that market AIFs that are not established in a EU country (“non-EU AIF”) within an EU jurisdiction.

This memo principally deals with the third category, non-EU AIFMs that market non-EU AIFs in the EU.

III. Exemption – Small AIFs

Pursuant to the AIFMD, AIFMs that manage small funds are exempt from the full rigor of the AIFMD regulatory regime.  A lighter regulatory regime is applicable to these AIFMs.

The AIFMD defines AIFMs that manage small funds as either: (1) an AIFM with aggregate assets under management not exceeding € 500 million, where the AIFs are not leveraged, and the investors do not have redemption rights for the first five years after their investment; or (2) an AIFM with aggregate assets under management not exceeding € 100 million.

AIFMs of smaller funds are largely exempted from the AIFMD, and will only be subject to registration, and limited reporting requirements.

IV. Marketing – Definition

As previously discussed, the AIFMD applies to non-EU AIFMs marketing non-EU AIFs in one or more EU jurisdictions.

The AIFMD defines marketing as “a direct or indirect offering or placement at the initiative of the AIFM or on behalf of the AIFM of units or shares of an AIF it manages to or with investors domiciled or with a registered office in the Union.”  This marketing definition does not include reverse solicitation, where the investor initiates the investment, and the investment is not at the AIFM’s direct or indirect initiative.

Thus, for example, if an EU investor initiated an investment in a U.S. AIF, managed by a U.S. AIFM, the U.S. AIFM and AIF would be unaffected by the AIFMD.  The AIFMD would only apply to U.S. AIFMs managing U.S. AIFs, if the U.S. AIFM solicited investment in the EU.

V. Regulating Non-EU AIFMs – National Private Placement Regimes

The AIFMD is designed to phase out national private placement regimes, creating a unified regulatory regime throughout the EU.  However, the AIFMD is scheduled to come into force in stages.

Between July 22, 2013, and 2018 (at the earliest), non-EU AIFMs will be able to market their non-EU AIFs in an EU jurisdiction (“EU Target Jurisdiction”) subject to the national private placement regimes applicable in that EU jurisdiction.

Thus for example, a U.S. AIFM marketing a U.S. AIF in the UK will be able to do so subject to the UK’s private placement regime.

VI. Regulating Non-EU AIFMs – Additional AIFMD Requirements

As explained, through 2018, the AIFMD will largely permit non-EU AIFMs to market non-EU AIFs subject to the private placement regime in the EU Target Jurisdiction.

However, the AIFMD does include three additional requirements for the non-EU AIFMD to be able to take advantage of the EU Target Jurisdiction’s private placement regime.  These include, specific disclosure and reporting requirements, cooperation agreements, and exclusion of AIFs and AIFMs established in certain countries.  Each of these will be discussed in turn.

a. Applicable AIFMD Reporting Requirements

By its terms, the AIFMD will require even non-EU AIFMs marketing non-EU AIFs pursuant to national private placement regimes to comply with certain AIFMD provisions concerning annual reports, disclosures to investors, periodic reporting to regulators, and acquisition of control over EU companies.

A non-EU AIFM will thus be required to make available: (1) an annual report for each non-EU AIF that it markets in the EU; (2) information relevant to potential investors, as well as changes in material information previously disclosed; (3) regular reports to the national regulator in the EU Target Jurisdiction; and (4) disclosure information to a listed or unlisted EU company over which the non-EU AIFM acquires control.

b. Cooperation Agreements

For non-EU AIFMs to be able to market their non-EU AIFs in an EU jurisdiction, the AIFMD requires that there be cooperation agreements in place between the regulator in the non-AIFM’s home jurisdiction, and the EU Target Jurisdiction.

ESMA has negotiated memoranda of understanding (“MOU”) with 34 regulators in a variety of jurisdictions.  These include regulators in Albania, Australia, Bermuda, Brazil, the British Virgin Islands, Canada (the provincial regulators of Alberta, Quebec and Ontario as well as the Superintendent of Financial Institutions), the Cayman Islands, Dubai, Guernsey, Hong Kong (Hong Kong Monetary Authority and Securities and Futures Commission), India, the Isle of Man, Israel, Jersey, Kenya, Malaysia’s Labuan Financial Services Authority, Mauritius, Montenegro, Morocco, Pakistan, Serbia, Singapore, Switzerland, Tanzania, Thailand, the United Arab Emirates and the United States (Federal Reserve Board, Office of the Comptroller of the Currency and Securities and Exchange Commission).

These MOUs, however, are insufficient to permit non-EU AIFMs to market their non-EU AIFs in any EU jurisdiction.  Rather, the EU Target Country must have a separate cooperation agreement with the regulator in the non-EU AIFM’s home jurisdiction (presumably these separate cooperation agreements will be based on the MOUs negotiated by ESMA).

Thus, for example, for a U.S. AIFM to be able to market its U.S. AIF in the UK, the UK’s Financial Conduct Authority must have a cooperation agreement with the United States’ Securities and Exchange Commission.

c. Exclusion of Non-Cooperative Country or Territory

Finally, pursuant to the AIFMD, to be able to market based on the EU Target Country’s private placement regime, neither the non-EU AIFM nor the non-EU AIF may be considered a country considered a “Non-Cooperative Country or Territory,” by the Financial Action Task Force on anti-money laundering, and terrorist financing.

In sum, through 2018, non-EU AIFMs may market their non-EU AIFs in EU jurisdictions according to the relevant EU Target Jurisdiction’s private placement regime, subject to a few additional AIFMD requirements.

VII. The AIFMD in Each EU Jurisdiction

The above discussion outlines the AIFMD’s general requirements pertaining to non-EU AIFMs marketing non-EU AIFs.

However, because to take effect the AIFMD must be transposed into the national law of each EU jurisdiction, and because through 2018 the AIFMD largely relies on national private placement rules to regulate non-EU AIFMs, there is bound to be substantial variation in the AIFMD’s application across EU jurisdictions.

The table below details relevant aspects of the AIFMD’s application in each of the EU jurisdictions (plus Norway, and Switzerland).  Supplementing the memorandum, the table serves as a basic guide for the AIFMD’s application to non-EU AIFMs seeking to market their non-EU AIFs in each of the EU jurisdictions.  The chart includes, for each country, whether it has transposed the AIFMD on time (“On time” / “Not on time”), an overview of the private placement regime, relevant reporting requirements, transitional provisions, and a list of the countries with which a cooperation agreement is in place.

Because some of the EU countries have yet to transpose the AIFMD, or have not completed the transposition, and cooperation agreement process we will indicate on the outline where completion of the process is pending.

BELGIUM

  • AIFMD Transposition
    • Not on time
  • Private Placement Regime
    • At present, AIFMs must be registered locally, and are subject to a minimum investment amount of € 250,000.
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions – Pending
  • Cooperation Agreements with non-EU Countries – Pending

DENMARK

  • AIFMD Transposition
    • Not on time.
  • Private Placement Regime
    • Denmark permits marketing to a maximum of 8 offerees, and requires that a non-EU AIFM be licensed in its member state of reference.1
  • Relevant Reporting Requirements
    • Non-EU AIFs licensed in another EU jurisdiction pursuant to AIFM regulations must submit additional documentation to the Danish FSA, including operating and managing plans, and contact information.
  • Transitional Provisions
    • Transitional provisions will permit non-EU AIFMs to market AIFs under Denmark’s current private placement regime until at least July 22, 2014 (provided that the AIFMs commenced marketing prior to the transposition date of July 22, 2013).
  • Cooperation Agreements with non-EU Countries – Pending

FINLAND

  • AIFMD Transposition
    • Not on time.
  • Private Placement Regime
    • Finland’s private placement regime permits AIFMs to market only to “professional” clients.
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions
    • The AIFMD is not expected to apply to non-EU AIFMs until 2015.
    • Transitional rules have been proposed (although not yet adopted) permitting AIFMs to market pursuant to existing private placement rules, provided that the AIFMs can show that they have made a good faith effort to comply with AIFMD.
  • Cooperation Agreements with non-EU Countries – Pending

FRANCE

  • AIFMD Transposition
    • On time.
  • Private Placement Regime
    • Under its present private placement regime, France does not permit AIFMs to actively solicit investment.
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions
    • It appears that a transitional period will apply until 22 July 2014, during which all French AIFMs will be able to continue marketing and / or managing any AIFs in France on the pre-AIFMD basis (for example by using reverse solicitation).
    • Other AIFMs (whether EU but outside France or non-EU) would, therefore, need to be authorized.
  • Cooperation Agreements with non-EU Countries – Pending

GERMANY

  • AIFMD Transposition
    • On time.
  • Private Placement Regime
    • Under the new German private placement regime, non-EU AIFMs may market to professional investors, subject to requirements.
    • To market in Germany, the non-EU AIFM must appoint an independent entity to act as a depositary (as defined in the AIFMD), and notify BaFin, Germany’s markets regulator, of the appointed depository’s identity.
  • Relevant Reporting Requirements
    • Notifying BaFin of its intention to market in Germany, and include an application with a comprehensive list of information and documents.  BaFin will have up to two months to review, and decide upon the application.
    • Making certain initial and ongoing investor disclosures.
    • Complying with reporting requirements to BaFin.
  • Transitional Provisions
    • Non-EU AIFMs that marketed funds in Germany by prior to the AIFMD’s July 22, 2013 effective date (“previously marketed funds”) will be permitted to continue marketing those previously marketed funds under existing private placement rules until July 21, 2014.
  • Cooperation Agreements with non-EU Countries – Pending

IRELAND

  • AIFMD Transposition
    • On time.
  • Private Placement Regime
    • Under Ireland’s private placement regime, non-EU AIFMs will be able to market in Ireland without restrictions additional to those of the AIFMD, discussed above.
  • Relevant Reporting Requirements
    • Ireland will only require that the non-EU AIFMs comply with the AIFMD’s reporting requirements for non-EU AIFMs discussed above.
  • Transitional Provisions
    • Non-EU AIFMs managing qualified investor alternative investment funds (“QIAIF”), as defined under the relevant Irish provisions, which were authorized prior to the July 22, 2013 transposition date will not be required to be AIFMD compliant until July 22, 2015.
    • Non-EU AIFMs managing QIAIFs authorized after July 22, 2013 will have two years from the QIAIF’s launch date to become AIFMD compliant.
  • Cooperation Agreements with non-EU Countries – Pending

ITALY

  • AIFMD Transposition
    • Not on time.
  • Private Placement Regime
    • Under Italy’s current private placement regime, which it seems will be available to non-EU AIFMs through 2015, AIFMs may market only to “expert” investors.
  • Relevant Reporting Requirements
    • Currently, AIFMs must disclose their balance sheets, certain administrative documents, and financial reports regarding their managers’ activities.
  • Transitional Provisions – Pending
  • Cooperation Agreements with non-EU Countries – Pending

LUXEMBOURG

  • AIFMD Transposition
    • On time.
  • Private Placement Regime
    • Through 2018, Luxembourg will permit small and non-EU AIFMs to market pursuant to its private placement regime.
  • Relevant Reporting Requirements
    • Luxembourg imposes certain transparency requirements on AIFMs, including disclosure of an AIFM’s net asset value, and disclosures upon gaining control of an EU company.
  • Transitional Provisions
    • Beginning on July 22, 2014, in addition to complying with Luxembourg’s private placement regime, non-EU AIFMs will be required to comply with the third country provisions of the AIFMD.
  • Cooperation Agreements with non-EU Countries
    • Luxembourg signed cooperation agreements with all 34 of the regulators that entered into MOUs with ESMA.

THE NETHERLANDS

  • AIFMD Transposition
    • On time.
  • Private Placement Regime
    • Netherlands will permit certain AIFMs to market pursuant to its private placement regime provided offerings are: (1) to less than 150 persons; (2) units have an individual nominal value of at least EUR 100,000 or consist of a package of units with at value of at least EUR 100,000; or (3) offered to professional investors only.
    • Non-EU AIFMs are exempted for offerings to qualified investors only if the AIFM is not domiciled in a non cooperative country under FATF rules and the Dutch regulator and the foreign regulator entered into a MOU.
    • AIFMs licensed by the relevant securities regulators in the USA, Jersey and Guernsey may offer to any investor under a license recognition regime.
  • Relevant Reporting Requirements
    • Notification to Netherlands Financial Markets Authority and reporting of investments, risk positions and investment strategy of AIF to Dutch Central Bank.
  • Transitional Provisions
    • Several grandfathering provisions for non-EU AIF’s that stopped marketing prior to 22 July 2013.
  • Cooperation Agreements with non-EU Countries – Pending

POLAND

  • AIFMD Transposition
    • Not on time.
  • Private Placement Regime
    • So far, the Polish regulator has not published an AIFMD transposition regulation.
    • However, under the existing private placement regime, non-EU AIFs that wish to market its units in Poland may do so if:
      • The units are qualified as equity or debt securities under their respective governing law; and
      • The units are offered under the “private placement” regime, meaning a nonpublic offer to sell securities to no more than 149 identified investors
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions
    • As mentioned above, the Polish regulator has not made an official announcement concerning AIFMS transposition.
  • However, a representative of the Polish regulator recently indicated in an interview that:
    • AIFMs currently marketing AIFs in Poland will have two years to determine whether they fall within the regulations of the AIFD; and
    • If so, the AIFMs will be required to become AIFMD compliant within the two-year period.
  • Cooperation Agreements with non-EU Countries – Pending

SPAIN

  • AIFMD Transposition
    • Not on time.
  • Private Placement Regime
    • Currently, no private placement regime is available, and it in not anticipated that a private placement regime will be made available in the implementation of the AIFMD.
    • Under proposed rules, registration with, and authorization from the Spanish regulator is required for non-EU AIFMs to market non-EU AIFs to professional investors only in Spain.
    • Authorization to market may be denied if:
      • The non-EU AIF’s home state applies discriminatory marketing rules against Spanish AIFs;
      • The non-EU AIF provides insufficient assurance of compliance with Spanish law, or insufficient protection of Spanish investors; or
      • The non-EU AIFs will disrupt competition in the Spanish AIF market.
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions – Pending
  • Cooperation Agreements with non-EU Countries – Pending

SWEDEN

  • AIFMD Transposition
    • Not on time.
  • Private Placement Regime
    • At present, there is no private placement regime for marketing AIFs in Sweden.
    • Many AIFs, simply fall outside the scope of Sweden’s regulations, and may market freely in Sweden
    • Other AIFs affected by Sweden’s regulation may only be marketed by a Swedish AIFM, or an AIFM regulated in another EU country.
    • It is unclear whether non-EU AIFMs will be able to continue to market freely after the AIFMD comes into force, or whether they will be prevented from marketing in Sweden altogether
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions – Pending
  • Cooperation Agreements with non-EU Countries – Pending

UNITED KINGDOM

  • AIFMD Transposition
    • On time.
  • Private Placement Regime
    • Provided that an AIF has been marketed by the non-EU AIFM prior to July 22, 2013 in an EEA jurisdiction, the non-EU AIFM will be able to continue to market the funds under the UK’s private placement regime until July 21, 2014 without complying with the requirements of the AIFMD.
    • For new funds marketed from July 22, 2013, the non-EU AIFM will need to comply with the reporting requirements of the AIFMD set out below.
  • Relevant Reporting Requirements
    • Prior to marketing in the UK, an AIFM must give the FCA written notification of its intention to do so.
    • In the notification, the AIFM must affirm that it is responsible for complying with the relevant AIFMD requirements, and that these relevant requirements have been satisfied.
    • Once it has submitted the notification to the FCA, the AIFM may begin marketing—it need not wait for the FCA’s approval.
    • Additionally, the AIFM is subject to disclosure requirements, including:
      • Ensuring that investor disclosure in fund marketing materials meets the disclosure and transparency requirements set out in the directive;
      • Reporting either annually or semi-annually to the FCA proscribed information; and
      • Submitting and publishing an annual report for each AIF that the AIFM manages or markets.
  • Transitional Provisions
    • The non-EU AIFMs that marketed any AIF in the EU prior to the AIFMD’s July 22, 2013 effective date will be permitted to market AIFs in the UK under the pre-AIFMD rules until July 21, 2014.
    • Non-EU AIFMs taking advantage of the transitional provision may do so irrespective of whether or not the FSA has cooperation agreements in place
  • Cooperation Agreements with non-EU Countries
    • The UK signed cooperation agreements with all 34 of the regulators that entered into MOUs with ESMA.

NORWAY2

  • Private Placement Regime
    • At present, Norway does not permit soliciting investment in AIFs.
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions – Pending
  • Cooperation Agreements with EU Countries – Pending

SWITZERLAND

  • Private Placement Regime
    • Non-EU AIFMs may market through the Swiss private placement regime without any additional regulation, approval, or license requirement or the investor is:
      • A License financial institution;
      • A regulated insurance institution; or
      • An investor that has concluded a written discretionary asset management agreement with a licensed financial institution, or a financial intermediary, provided that information is provided to the investor through the financial institution, or intermediary, and that the financial intermediary is:
        • Regulated by anti-money laundering regulation;
        • Governed by the code of conduct employed by a specific self-regulatory body recognized by the Swiss regulator; and
        • Compliant with the recognized standards of the self-regulatory body.
  • Relevant Reporting Requirements – Pending
  • Transitional Provisions
    • Non-Swiss AIFMs have until March 1, 2015 to:
      • Appoint a Swizz representative, and a Swiss paying agent; and
      • Comply with all relevant regulations.
    • Non-Swiss AIFMs that have yet to be subject to Swiss regulation must:
      • Contact, and register with the Swiss regulator by September 1, 2013; and
      • If not sufficiently licensed in their home country, apply for a license by March 1, 2015.
    • Cooperation Agreements with EU Countries – Pending

1 An AIFM’s member state of reference (“MSR”) is the member state where the marketing of most of the AIF takes place.  So, for example if a U.S. AIFM markets in Denmark, and Denmark is the Member State of Reference, then the Danish FSA must issue the U.S. AIFM a license prior to commencement of the U.S. AIFM’s marketing activities in Denmark.

2 Norway, and Switzerland are non-EU countries of interest.  Because they are not part of the EU, they are not required to transpose the AIFMD.

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Doing Business In Latin America: Does Your Local Supplier Have Best Practices In Place So That Your Company Can Avoid Liability Under The Foreign Corrupt Practices Act (FCPA)?

Sheppard Mullin 2012

Imagine yourself the CEO of a successful multinational company. In the past few years, you have overseen ACME’s expansion into Latin America – a market whose demographic profile holds the promise of mouthwatering profits for your company, particularly with the upcoming holiday season. As they say, la vida es buena!

In planning for the Latin America expansion, you knew about the rules and prohibitions of the Foreign Corrupt Practices Act (“FCPA”) and implemented measures to ensure your employees do not run afoul of the law. However, you may not have known that the company can incur FCPA liability for payments made by third parties, such as such as suppliers, logistics providers, and sales agents, with whom your company works. In fact, a company can be held liable if it knows or should know that a third-party intends to make a corrupt payment on behalf of or for the benefit of the company. Because a company can be responsible for conduct of which it should have known, a conscious disregard or deliberate ignorance of the facts will not establish a defense.

To protect your company from third party liability, it is essential to perform due diligence on potential business partners. This is not to say that you cannot consider the recommendations of local employees in selecting business partners. Relying on those recommendations alone, however, could expose the company to FCPA liability if that company does not conduct itself with the same level of integrity that you do. The amount of diligence necessary varies from one potential business partner to the next and can include an anti-corruption questionnaire, document review, reference interviews, or local media review, among other things.

That’s all well and good, but what about companies with whom you are already doing business and whom you now realize you may not have adequately investigated? Asking to review those companies’ FCPA compliance policies is a good first step. If you determine that a policy is inadequate, you may ask the company to provide FCPA training to its employees. You should also carefully monitor the company’s contract performance to ensure compliance. In particular, you should consider evidence of unusual payment patterns, extraordinary “commissions,” or a lack of transparency. The key question is: how is the company spending your money?

When in doubt, experienced legal counsel can assist you in navigating these and other FCPA issues. For example, Sheppard Mullin offers Spanish language training on the provisions of the FCPA and advice for successfully implementing internal safeguards and controls to protect against FCPA liability.

With a solid FCPA plan in place, your thoughts wander back to the upcoming holiday season and your company’s projected profits for the new Latin America division and you smile to yourself. La vida es buena.

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International Trade Commission Addresses Use of Standard-Essential Patents in Section 337 Investigations

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The International Trade Commission (ITC) addressed for the first time the issue of whether infringement of a patent that has previously been declared “standard-essential” may form the basis for either a limited exclusion order or cease-and-desist order under a § 337, ruling that nothing in the ITC’s enabling statute prevents issuing an exclusion order, even if the complainant is under an obligation to license the patent.  Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, Inv. No. 337-TA-794, (U.S. ITC, June 4, 2013) (ITC, per curiam); Commissioner Pinkert, dissenting).

The complainant, Samsung Electronics, held two patents that it had previously declared to be “standard-essential” to the Universal Mobile Telecommunications System promulgated by the European Telecommunications Standards Institute (ETSI).  ETSI’s Intellectual Property Rights policy required Samsung to offer licenses to such patents on fair, reasonable and non-discriminatory (FRAND) terms.  After licensing negotiations between Samsung and the respondent, Apple, broke down, Samsung filed a complaint at the ITC requesting a limited exclusion order against Apple’s mobile communication products.  After the administrative law judge ruled, on an initial determination (ID), that none of the patents at issue were valid and infringed, the ITC determined to review the ID and sought views from both the parties and the public as to whether Samsung’s declaration of the patents at issue as “standard-essential” should affect either the ITC’s analysis of whether there was a violation of § 337 or what relief should be provided.

In its final determination, the ITC found one of the two patents to be both valid and infringed, and that the proper relief was a limited exclusion and cease-and-desist order directed to the infringing articles.  The ITC first rejected Apple’s argument that the Commission should not investigate an alleged violation of § 337 based on infringement of patents subject to a FRAND undertaking, ruling that under § 337(b)(1), the ITC is required to investigate any alleged violation based upon a complaint under oath, whether or not those patents have been declared standard-essential.  The ITC also rejected Apple’s theory that the Commission “cannot address infringement of standard-essential patents other than in the exceptional scenarios such as where a potential licensee has refused to pay a royalty after a U.S. court has determined that royalty to be FRAND, or where no U.S. court has jurisdiction over the potential licensee in order to set a FRAND rate,” ruling that the remedies provided under § 337 could be imposed in addition to any damages or injunctions available from a district court.

The ITC further determined that Apple had not “properly argued any affirmative defense that would preclude the Commission from finding a violation based on assertion of a declared-essential patent,” such as a breach of contract, promissory estoppel, laches or fraud  The ITC ruled that even if Apple had offered sufficient evidence that the FRAND declaration was a legally enforceable obligation, the patents at issue were actually necessary to practice the standard and that Samsung was required to grant irrevocable licenses under FRAND terms to any party, it still would not have found in Apple’s favor, because the parties’ final offers were sufficiently close to each other that Samsung did not violate its obligation to negotiate in good faith.  Importantly, the ITC found that Samsung was not under any obligation to make an initial offer that was FRAND, because “the SSO intends the final license to be accomplished through negotiation” and “even if it were true that a FRAND agreement that requires Apple to pay Samsung ultimately is not reasonable, the offers that Apple criticizes do not necessarily demonstrate that Samsung has violated its FRAND obligations by failing to negotiate in good faith” (emphasis in original).  Finally, the ITC rejected the theory that whether a patent has been declared standard-essential should be considered when the public interest is analyzed, finding that its consideration of the public interest is limited solely to the four factors listed in § 337(d)(1).

Uncommonly for a Commission opinion, Commissioner Dean Pinkert wrote a dissent arguing that the ITC should not issue an exclusion order based on Samsung’s obligation to license the patents on a FRAND basis, that the evidence indicated Samsung was unwilling to make a FRAND licensing offer with respect to the standard-essential patents and that the absence of a FRAND offer should have a bearing on whether relief under § 337 is in the public interest.  Specifically, Commissioner Pinkert found that it was neither fair nor non-discriminatory for a FRAND-encumbered patent holder to require licenses to non-FRAND-encumbered patents as a condition for licensing the FRAND-encumbered patent.  Commissioner Pinkert also would have found that the statutory language of § 337(d)(1), as well as the legislative history of the statute that “any evidence” of price gouging or monopolistic practices on the part of the complainant would be a proper basis for denying exclusion, suggests that the section should be read broadly.

Practice Note:  The Commission’s rejection of a per se rule barring exclusion orders for patents that have been declared standard-essential is likely to lead to have a number of effects, including increased litigation of standard essential patents at the ITC, counter-suits requesting that a district court rule determine what royalty rate is FRAND and/or requesting that a complainant be enjoined from proceeding before the ITC, presidential review taking on increased importance and potential legislative action to curb the ITC’s jurisdiction.

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Health Resources and Services Administration (HRSA) Publishes Orphan Drug Rule for 340B Program

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Rule requires most manufacturers to change government pricing methodologies, calculations, and systems.

On July 23, the Health Resources and Services Administration (HRSA) of the U.S. Department of Health and Human Services (HHS) published a regulation[1] increasing the number of entities to which pharmaceutical manufacturers must sell orphan drugs at statutory ceiling prices under the 340B drug discount program, and complicating the determination of eligibility to purchase these drugs at the 340B price. This regulation conditions the ability of certain hospitals to purchase orphan drugs at the 340B price on implementation of costly new systems for tracking drug use and requires virtually every brand drug manufacturer to change its government pricing methodologies, calculations, and systems.

340B Program Background

The 340B drug discount program is a voluntary program created by section 340B of the Public Health Service Act, 42 U.S.C. § 256b, and implemented through a pharmaceutical pricing agreement (PPA) between manufacturers and HHS. Manufacturers opt into the program by signing these agreements and assuming the obligations set forth in their terms, which are specified by statute and linked, in many respects, to the terms of the Medicaid drug rebate statute. At the core of the agreement is the obligation to charge covered entities no more than a statutory ceiling price for drugs covered by the statute, which are defined by the term “covered outpatient drug” in the Medicaid statute.

Section 7101 of the Affordable Care Act (ACA) expanded the categories of hospitals eligible to purchase at the 340B ceiling price to include freestanding cancer hospitals, sole community hospitals, rural referral centers, and critical access hospitals. The ACA, as amended, simultaneously limited these hospitals’ participation in the program by excluding “a drug designated by the Secretary [of HHS] under section [526 of the Federal Food, Drug, and Cosmetic Act (FFDCA)] for a rare disease or condition”[2] from the definition of “covered outpatient drug.”

Orphan Drug Rule

HRSA’s regulation, codified at 42 C.F.R. part 10, includes a new section 10.21 (the Final Rule or the Orphan Drug Rule), which establishes standards for determining when the statutory exclusion applies, i.e., when a drug designated under section 526 is excluded from the definition of “covered outpatient drug.”[3]

The Final Rule interprets the statutory exclusion from manufacturers’ obligations under their pharmaceutical pricing agreements as being limited to purchases of designated drugs when used by their customers to treat orphan indications. As a result of this regulatory limitation, the Final Rule requires manufacturers to charge the newly added hospitals no more than the statutory ceiling price for drugs designated as orphan drugs when these drugs are used for nonorphan indications. At the same time, the Final Rule allows an affected hospital to purchase drugs at the 340B price only if the hospital has developed a system for tracking outpatient use of a purchased drug that satisfies the requirements of the Final Rule.

HRSA’s regulatory requirements are predicated on an interpretation of congressional intent underlying this provision of the ACA, which ties the definition of “covered outpatient drug” under the 340B drug discount program to the scope of other unrelated benefits of orphan drug designation, such as marketing exclusivity and tax credits. However, there are other indicia that Congress did not intend the orphan drug exclusion to be as narrow as HRSA has now declared through rulemaking. When asked to clarify the scope of the exclusion for all the newly added hospitals, Congress instead removed children’s hospitals (originally subject to the orphan drug exclusion in the ACA) from the provision and restated the exclusion for the rest.[4]

Legislative Rulemaking Authority

Congress has not yet delegated authority to HRSA to promulgate substantive regulations that set standards for determining the scope of manufacturers’ obligations under the statute or that impose new duties on manufacturers not specified in the terms of their agreements. The only authority that Congress has previously delegated to HRSA to promulgate regulations is the limited authority provided in section 7102 of the ACA, which allows HRSA to issue the following: 1) regulatory standards and methodology for calculating ceiling prices; 2) regulations establishing standards for the imposition of civil monetary penalties; and 3) a regulation establishing an administrative process for the resolution of claims.

HRSA has called the Orphan Drug Rule a “clarification” of the statutory exclusion; however, the rule imposes new obligations on all stakeholders. It requires manufacturers to include in the program drugs designated under section 526 of the FFDCA and concurrently allows affected hospitals to purchase them at the 340B price, under certain circumstances, and then establishes standards and requirements for determining those circumstances.

340B Entity Implementation Issues

In order to ensure that drugs used by covered entities for orphan diseases or conditions are excluded, the Final Rule provides that covered entities may not purchase designated orphan drugs for nonorphan indications under the 340B drug discount program unless they provide HRSA with assurances that they have systems capable of identifying and tracking the use of designated drugs in treating their patients and transmitting the data to their purchasing systems. Thus, a sale of a particular drug to a particular affected hospital could be classified as purchased under the 340B program or outside the 340B program, depending on whether the purchaser 1) has informed HRSA that it has a system capable of complying with the rule’s requirements and 2) uses the drug to treat a patient for an orphan disease or condition.

Because the 340B program is an outpatient program only, hospitals must distinguish between drugs purchased for inpatient and outpatient purposes. HRSA allows hospitals to have a single physical inventory and maintain separate accounts for inpatient purchases and outpatient purchases, and many hospitals have split-billing systems that order 340B drugs only as needed under the program. The same rules apply when contract pharmacies order drugs to fill prescriptions of 340B hospital patients and the hospital purchases drugs to replenish the pharmacy’s inventory.

However, hospitals’ existing 340B purchasing systems and pharmacy prescription data do not currently include hospital billing codes or other information from patients’ medical records indicating the diseases or conditions for which drugs are prescribed. Thus, it may be some time before hospitals seeking to purchase orphan drugs for nonorphan indications at 340B prices are able to comply with the requirements of the Orphan Drug Rule. Due to the difficulties in satisfying the requirements, some affected hospitals may choose to purchase all of their orphan drugs outside the 340B program if they cannot or do not wish to develop a compliant tracking system. Alternatively, some hospitals may choose to have certain of their facilities purchase outside the 340B program.

The Orphan Drug Rule provides for acceptable “alternate” tracking systems if HRSA approves such systems, but the rule does not provide hospitals with the standards for what would be acceptable to ensure compliance. It also does not appear that manufacturers will have any advance insight into the systems or an opportunity to comment on them. Additionally, the Final Rule does not offer assistance to stakeholders on how contract pharmacies can ascertain from prescription information whether a patient of a 340B hospital has been prescribed a drug to treat an orphan indication or some other indication.

Alternatives for Hospitals 

Hospitals affected by the Orphan Drug Rule, such as rural referral centers, may also qualify for 340B participation as disproportionate share hospitals, which are not subject to the rule. In that case, they may choose not to satisfy the requirements of the rule (applicable to rural referral centers) but would be prohibited from purchasing outpatient drugs outside the program, such as those carved out for Medicaid, through group purchasing organization (GPO) agreements (applicable to disproportionate share hospitals).

For most of the new categories of hospitals, individual entities may purchase orphan drugs outside the program under GPO agreements and benefit from the discounts available through those agreements. Thus, they are not disadvantaged by the 340B drug discount program if they cannot or are unwilling to satisfy the requirements to purchase orphan drugs under the program. However, for freestanding cancer hospitals, the Final Rule maintains the statutory prohibition against purchasing covered outpatient drugs through GPO arrangements. If these hospitals do not comply with the regulatory requirements, they must purchase orphan drugs in the open market or negotiate contracts with manufacturers.

Manufacturer Government Pricing System Issues

Based on the Final Rule, the classification of a manufacturer’s sale as a 340B program sale for purposes of the manufacturer’s drug price reporting obligations depends on each eligible hospital’s compliance with the rule’s requirements. That means a manufacturer’s operations must code each affected hospital and, in some cases, facilities within a medical center to determine whether the purchase of an orphan drug for a nonorphan indication is under the program or outside the program. These codings can change quarter to quarter as 340B hospital entities elect either to start or stop using the required tracking systems. Likewise, wholesalers processing invoices must be provided with information that allows them to know when a hospital is eligible to order an orphan drug under the 340B agreement at statutory ceiling prices (as opposed to under a GPO agreement, other contract, or open market), and the manufacturer’s chargeback validation system must be able to differentiate as well. Otherwise, a manufacturer could easily and inadvertently provide 340B pricing outside the program, which could trigger a best price under the Medicaid drug rebate program and simultaneously drive down the quarterly 340B statutory ceiling price. Many manufacturers’ current government pricing systems seek to identify best price-eligible sales at the class-of-trade level, with sales of orphan drugs to 340B entities coded for inclusion in best price, while sales of nonorphan drugs to these same entities are excluded from best price. Manufacturers of orphan drugs must now develop solutions that permit identification of the eligible and ineligible price points necessitated by the Final Rule.

Since the inception of the Medicaid drug rebate program, the Centers for Medicare and Medicaid Services (CMS) has refused to consider all transactions with covered entities to be exempt from best price and—in the absence of a clear statutory provision, such as the exemption of inpatient drug prices paid by disproportionate share hospitals—it is risky for manufacturers to assume all outpatient sales of orphan drugs to 340B eligible hospitals will be exempt from best price. Currently, for example, CMS’s proposed government pricing rule excludes from best price only “[p]rices charged under the 340B drug pricing program to a covered entity described in section 1927(a)(5)(B) of the Act.”[5]

Off-Label Use

The Final Rule does not answer comments about concerns with off-label use. The Final Rule states that a drug must be approved by the Food and Drug Administration for marketing to be in the program; however, it does not answer the question of whether a drug should be excluded if it is designated for an orphan indication, approved only for a nonorphan indication, but used by a covered entity off-label for the designated orphan indication. The Final Rule also does not indicate whether a manufacturer with a product approved only for an orphan indication will be deemed to be selling the product to a hospital for off-label use if it provides the 340B price for that off-label nonorphan use.

Implications

Hospitals added to the 340B program by the ACA (other than children’s hospitals) need to review their existing systems and modify them to satisfy their obligations under the Final Rule before they can purchase orphan drugs under the program. Manufacturers need to review their drug price reporting systems to ensure they are able to identify when a covered hospital is purchasing orphan drugs outside the program to avoid inadvertently setting their best price at the 340B price.

[1]. Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program, 78 Fed. Reg. 44,016 (July 23, 2013) (to be codified at 42 C.F.R. pt. 10), available here.

[2]. 42 U.S.C. § 256b(e).

[3]. Exclusion of Orphan Drugs, supra note 1.

[4]. See Medicare and Medicaid Extenders Act of 2010, Pub. L. 111-309, § 204.

[5]. Medicaid Program; Covered Outpatient Drugs 77 Fed. Reg. 5318, 5363 (Feb. 2, 2012) (emphasis added), available here.

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