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Federal
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March 2007
NCTR, NASRA, CII Create New “National Institute for Retirement Security” NCTR has joined forces with NASRA and the Council of Institutional Investors (CII) to create a new non-profit institute that will conduct research and promote educational programs with the goal of creating a better public understanding of the role and value of traditional defined benefit pension systems. The National Institute for Retirement Security will be governed by a board consisting of two representatives from each of the three sponsoring organizations, with a seventh member chosen by these six. The Institute, established as a 501(c)(4) not-for-profit organization, is intended to help offset the "research" and other reports prepared by opponents of DB pensions in support of their efforts to convert public systems to a defined contribution model. According to NCTR President Meredith Williams, the new entity "will help foster a deep understanding of how pensions help lower overall costs to taxpayers while still ensuring vital public services are delivered by qualified and experienced professionals." "Another aspect often overlooked is the dual role of State and local governments as policymakers and employers. Cities and States must continue to get retirement right, or they could become the provider of last resort for workers unable to survive on their own in retirement – at a much higher cost to taxpayers," Williams added. Efforts are currently underway to establish the Institute's organizational structure, including selection of a board of directors and executive director. Results are expected to be announced later this month. NCTR/NASRA/CII
Press Release A Federal District Court Judge has ruled that the Illinois Sudan divestment statute is unconstitutional and enjoined the State from enforcing it. However, upon a close reading of the opinion, the Court did NOT find that the Illinois law’s pension code amendment violated the U.S. Constitution’s Supremacy Clause. Nor did the Court find that it constituted an unacceptable intrusion on the Federal government’s ability to conduct foreign policy. Indeed, the opinion suggests that divestment requirements applied solely to state-funded pensions could possibly pass Constitutional muster based on a “market participant” exception. On the other hand, the judge could find no evidence to support contentions that plan divestiture had any effects on corporate behavior related to the Sudan – a point that opponents of blanket divestiture have argued for some time. Meanwhile, divestment efforts continue, with mutual funds – specifically Fidelity Investments –providing the latest targets. On February 23, 2007, Judge Matthew Kennelly of the U.S. District Court for the Northern District of Illinois issued his decision in the lawsuit brought by the National Foreign Trade Council (NFTC) and eight boards of Illinois public employee pension funds challenging the constitutionality of the Illinois “Act to End Atrocities and Terrorism in the Sudan." (See June 2006 NCTR Federal E-news) The Illinois Sudan Act amended the State’s "Deposit of State Moneys Act" to prohibit the Illinois Treasurer from depositing State funds into any financial institution whose customers have certain types of connections with Sudan. The statute also amended the Illinois Pension Code to prohibit the investment of public pension funds in Sudan-connected entities. In his decision, Judge Kennelly considered whether the amendments to both Illinois statutes were preempted by Federal laws governing relations with Sudan under the U.S. Constitution’s Supremacy Clause. (Preemption can occur if Congress expressly states its intention to occupy a field; if Congress “evidences an intent” to occupy a given field; or if a State law actually conflicts with Federal law.) The Court also examined whether the Illinois Sudan Act intruded on the Federal government’s exclusive authority to conduct foreign affairs. Finally, the Court looked at the issue of possible violations of the Constitution’s Foreign Commerce Clause. (State regulations that discriminate against foreign commerce on their face are per se invalid, and those that create a substantial risk of conflicts with foreign governments or impede the Federal government’s ability to speak with one voice in regulating commercial affairs with foreign states are also unconstitutional.) In the first two instances, the Court held that the Illinois amendment affecting the deposit of State funds was unconstitutional. While Congress gave the President “broad leeway to impose, or decide not to impose, an array of sanctions,” the Illinois statute does not allow for such flexibility. Moreover, the Illinois Act now applies to areas of Sudan, such as Southern Sudan, that are no longer subject to Federal sanctions. (See November 2006 NCTR Federal E-news) “Federal law permits the president to change policy rapidly in response to developments in Sudan, but there is no such mechanism in the Illinois Sudan Act,” the Court noted. Therefore, due to this lack of flexibility, as well as the extended geographic reach and impact on foreign entities of the Illinois statute (which applies to all entities, including overseas subsidiaries or affiliates of United States Corporations) the Court ruled that the provision of the Illinois Sudan Act dealing with deposit of funds was preempted by Federal law dealing with the Sudan and also interfered with the Federal government’s conduct of foreign affairs. However, when the Court applied a Supremacy Clause analysis to the Illinois Sudan Act’s provisions affecting the State’s pension code, it did not see a similar problem. First, the Court noted that Federal law expressly restricts how companies can and cannot do business in Sudan, but is silent regarding divestment of holdings connected with Sudan. “Moreover, the potential effects of pension fund divestment on the national government’s ability to conduct foreign policy are highly attenuated,” the Court pointed out. The amendments to the Illinois Deposit of State Moneys Act “directly impact the ability of banks and corporations to do business with Sudan and therefore interfere with federal policy by pressuring them to cut ties with that country,” the Court argued. However, the amendment to the Illinois Pension Code merely prohibits state and municipal pension funds from investing in companies that do business with or in Sudan. Reflecting an argument often made by those who question the efficacy of divestment in changing corporate behavior, the Court said that it “has been presented with no evidence suggesting that these funds’ inability to purchase the securities of such companies would be in any way likely to affect their decision to do business in that country.” Accordingly, the Court found that pension fund divestment does not create any obstacle to Federal policy dealing with the Sudan, and the provision of the Illinois Sudan Act that amends the Illinois Pension Code is therefore not preempted by Federal law. Furthermore, once again echoing arguments similar to those made by opponents of divestiture, the Court found that it “is not persuaded that the inability to offer debt or equities to Illinois public pension funds imposes a burden on corporations that makes them more likely to alter their relationships with entities doing business in Sudan.” Therefore, the Court also concluded that the section of the Act amending the Illinois Pension Code does not interfere with the Federal government’s authority to conduct foreign affairs. Only when the Court turned to the issue of possible violations of the Constitution’s Foreign Commerce Clause did it find problems with the Illinois law’s amendments to its pension code. The Court concluded that “there is little doubt that the conduct the Illinois Sudan Act seeks to proscribe involves foreign commerce,” and that the amendments to both the Deposit of State Moneys Act and the pension code are unconstitutional violations of the Foreign Commerce Clause. However, the Court left unanswered the question of whether a so-called “market participant exception” should apply that would circumvent the constitutional prohibition. (Generally, when States are acting merely as market participants, they are typically exempt from Interstate Commerce Clause restrictions. The theory is that when a State is acting as a party to a commercial transaction, not as a regulator, and is therefore subject to the same restrictions imposed on private market participants, then it should also be free from Federal constraints.) Does the “market participant” exception apply to the Foreign Commerce Clause? Courts are split on the issue, and the Supreme Court has not addressed the question. Judge Kennelly’s ruling is also of little help. Since the pension funds of municipal entities were also affected by the Illinois law, he found that Illinois was not acting exclusively as a market participant through its enforcement of the Illinois Sudan Act. (The Seventh Circuit has held that when the market participants are local political subdivisions, then the market participant doctrine does not apply to the state.) So what does all of this mean? First, the Illinois ruling should clearly not be viewed as a total repudiation of State divestment laws on Constitutional grounds when State law implicates only pension fund investment activity. Furthermore, it is possible that a market participant exception could apply that would shield such State statutes from violating the Foreign Commerce Clause, particularly if the State law only applied to State plans. On the other hand, the decision does provide clear findings by a Federal court that may be helpful to those who argue that blanket divestiture is ineffective. For example, as noted earlier, the opinion finds that there is “no evidence” that pension fund divestiture is “in any way” likely to affect companies’ decision to do business in the Sudan. Nor is the Court persuaded that divestiture imposes a burden on corporations “that makes them more likely to alter their relationships with entities doing business in Sudan.” While no appeal has yet been filed in the NFTC case, it has been reported that the Illinois law's chief sponsor, State Senator Jacqueline Collins, has said she would address the judge's concerns with "some minor technical changes.” In the meantime, proponents of Sudan divestment have expanded their focus beyond pension funds and have now organized a new grassroots campaign targeting Fidelity Investments, called “Fidelity Out of Sudan!” (FOS). The effort, officially launched on January 26, 2007, has a website and is organizing a letter-writing campaign and a public relations effort supported by actress Mia Farrow. On the website, phone numbers and e-mail addresses for pertinent Fidelity officials are provided, along with sample scripts to be used in communicating with them. A petition is also available. According to FOS, Fidelity, through its mutual funds, "not only has been a major investor in two of the largest oil companies operating in Sudan, PetroChina (PTR) and China Petroleum (SNP, aka Sinopec), but it has been significantly increasing its holdings” in these companies and is “the largest holder of PetroChina (PTR) on the New York Stock Exchange.” FOS urges investors to “[m]ove your money out of Fidelity.” The Boston-based FOS campaign has attracted the endorsement of Congressman Michael Capuano (D-MA), who has written to thank them for their efforts in urging Fidelity investments to divest from PetroChina and Sinopec. “I hope this is just the start of a broader campaign to carry the message about the genocide in Darfur to every entity that invests abroad – private and public,” said the Congressman, who is a member of the House Financial Services Committee and the co-founder and co-chair of the Congressional Caucus on Sudan. NFTC
Court Decision New IRS Notice on PPA Cash Balance Amendments Raises New Concerns for Standard Refund, DROP Provisions of DB Plans The Internal Revenue Service (IRS) is seeking comments on future guidance it plans to issue dealing with new provisions of the Pension Protection Act (PPA) generally relating to cash balance plans, other hybrid defined benefit pension plans and benefit accrual standards for them. In doing so, the IRS appears to be taking the view that if certain participants' accrued benefits, or only a portion of a participant's accrued benefit, is determined by lump sum based accrual methods, then the plan will qualify as a statutory hybrid plan. Thus, if your otherwise “plain vanilla” DB plan has a standard refund of contributions feature, you may find yourself viewed as a hybrid. So what? For now, it may not be a problem under the Internal Revenue Code (IRC), but it does raise potential issues for public plans under the Age Discrimination in Employment Act (ADEA), administered by the Equal Employment Opportunity Commission (EEOC). When the PPA was adopted, it included provisions that were intended to address problems associated with the conversion of defined benefit plans to cash balance plans in the private sector. (Cash balance plans are essentially DB plans in which benefits are accumulated in a “hypothetical account” which can be paid at retirement as an annuity or a lump sum.) Such conversions had essentially been shut down due to court decisions that found the rates of benefit accrual to be age discriminatory. (See September 2006 NCTR Federal E-news) The PPA dealt with this issue by providing that a cash balance plan or other “applicable defined benefit plan” will not be treated as violating the prohibition on age discrimination if a participant’s accrued benefit, as determined as of any date under the terms of the plan would be equal to or greater than that of any similarly situated, younger individual who is or could be a participant. In order to meet this standard, the PPA provides that such a plan must provide that “any interest credit (or an equivalent amount) for any plan year shall be at a rate which is not greater than a market rate of return.” (Treasury will be providing further guidance on this rate, but for now, it is essentially the interest rate on long-term investment-grade corporate bonds.) In mid January, the IRS issued Notice 2007-6, providing transitional guidance on the requirements of Sections 411(a)(13) and 411(b)(5) of the IRC, the new sections added by the PPA dealing with cash balance plans and other hybrid defined benefit pension plans. Given that IRC Section 411(dealing with vesting and benefit accrual) generally does not apply to public pension plans, it did not arouse much attention in the public sector. However, since the same section of the PPA that made these amendments
to the IRC and ERISA also made virtually the same changes to ADEA (a
new Section 4(i)(10), “Special Rules Related to Age” was
added to this law), and since ADEA does apply to public pension plans,
what if the EEOC were to adopt the same definitional standards proposed
by the IRS? The PPA defines a DB plan that would be subject to the new provisions as one under which the accrued benefit (or any portion thereof) of a participant is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation. The IRS Notice describes such plans as “statutory hybrid plans.” So far, so good, you might think. But the IRS then goes on to define a statutory hybrid plan as “a plan that is either a lump sum based plan or a plan that has a similar effect to a lump sum based plan.” What is a “lump sum based plan,” you may ask. For purposes of this notice, the term means “a defined benefit plan under the terms of which the accumulated benefit of a participant is expressed as the balance of a hypothetical account maintained for the participant or as the current value of the accumulated percentage of the participant’s final average compensation, and includes a plan under which the accrued benefit under the terms of the plan is calculated as the actuarial equivalent of such a hypothetical account balance or accumulated percentage.” Furthermore, whether a plan is a lump sum based plan is determined “based on how the accumulated benefit of a participant is expressed under the terms of the plan, and does not depend on whether the plan provides for an optional form of benefit in the form of a lump sum payment.” In short, what if the EEOC were to adopt the IRS approach? Could you find that your system has a statutory hybrid plan even if only a relatively small number of your participants have their accrued benefits determined using a “lump sum based” approach, or if only some part of an overall accrued benefit is determined by using this accrual method? Maybe, according to the IRS notice. Thus, not just true cash balance plans and what we may think of as hybrid plans (i.e., combination plans with DB and DC features) could potentially be subject to the new ADEA interest rate cap; plans with fixed interest features such as annuity savings accounts, DROPs, and even refunds of employee contributions could also find themselves in violation of ADEA if the interest rate used exceeded a market rate of return. The EEOC has not yet decided how it will implement its mirror language in this area. However, it will be working in consultation with the Treasury Department, since the PPA’s ADEA amendment requires that the term “applicable defined benefit plan” is to have the meaning given such term by section 203(f)(3) of the Employee Retirement Income Security Act of 1974 and section 411(a)(13)(C) of the IRC. The IRS has requested comments on its Notice. Specifically, it is seeking comments on the application of the special rules for hybrid plans in the case of a plan in which only certain participants’ accrued benefits, or only a portion of a participant’s accrued benefit, is determined by reference to a hypothetical account balance or an accumulated percentage of final average compensation. Comments are due by April 16, 2007. As Promised, House Holds Hearings on 401(k) Fees; Legislation Likely
The hearing, held on March 6, 2007, was in response to a Governmental Accountability Office (GAO) Report issued last November that found the vast majority of participants in 401(k) plans don’t know how much in management and investment fees they are paying. As a result, the GAO said that they may be losing significant amounts of money, and called for disclosure of more comprehensive information on fees. (See December NCTR Federal E-news) Calling current disclosure rules “weak,” Chairman Miller said “We have to ask whether all these fees are necessary, and we have to examine whether they are undermining workers’ retirement security.” As he pointed out, “even a seemingly small difference in the fees that workers pay can make an enormous difference in the overall size of their 401(k) account balance.” A one percentage point difference in fees can reduce retirement benefits by nearly 20 percent, the Committee was told by one witness, who called current costs of 401(k) plans excessive. According to Matthew Hutcheson, an independent pension fiduciary, 401(k) plans typically cost from 3% to 5% of assets to manage on an annual basis, a figure which should be substantially less – about 1.5% would be more appropriate, he suggested. Hutcheson called for full disclosure of all financial services provider costs and expenses, with “stiff monetary sanctions” for failures to do so. He also proposed that plan fiduciaries be required to itemize all fees and expenses taken from plan assets at any level. Another witness called for an outright ban on any organization that manages money from selling and administering 401(k) plans. However, the witness for the American Benefits Council warned that while clear, meaningful disclosure was needed, “overly complicated and burdensome disclosures would only push employers and service providers away from the 401(k) system,” particularly small employers. His concerns were echoed by the Committee’s ranking Republican, Howard P. “Buck” McKeon (R-CA). McKeon warned that Congress “must resist the urge to simply overload workers with information – or worse, to mandate the distribution of out-of-context information that may lead participants to make poor investment choices.” “A quick fix like that may help some of us feel good about ourselves,” he cautioned, “but it would do great harm to workers and retirees.” Nevertheless, it appears that a legislative response is in the works. “Inaction is probably not an option for the Committee,” Chairman Miller is quoted as having remarked at the hearing. The subject of governmental supplemental plans did not come up, and technically these are not within the jurisdiction of the Education and Labor Committee, which covers ERISA plans. However, Congressman Miller’s chief staffer on this subject has told NCTR that she is interested in knowing if there are similar problems with fees in the public sector. She has also raised concerns with recent press reports dealing with union endorsements of investment providers and products in return for financial support, such as the sponsorship of union conferences and even direct payments to union treasuries. An examination of 403(b) and 457 plans, perhaps by another Committee, could therefore be a possibility. On a more positive note, Chairman Miller’s comments regarding 401(k) plans in general were most interesting. Noting that traditional DB pensions are becoming less and less common, the Congressman observed that this trend places a greater burden on Social Security, the sole source of retirement income for half of all retirees and the primary source of income for two-thirds of all retirees. But, he pointed out, Social Security was not intended to be a primary source of retirement income for workers; it was meant to supplement workers’ pensions and other retirement savings. “Here’s the rub,” Mr. Miller observed. “401(k)-style plans were never intended to be a primary source of retirement income, either. They, too, were designed to give workers a way to supplement their retirement income.” For this reason, he said that it is “critical” for Congress to not only “make sure that workers with 401(k)s are getting the best bang for their buck,” but also to explore “how we can best revitalize traditional pensions.” Sweet words indeed for DB plan proponents, who often decry the focus by Congress on 401(k) plans as thepreferred retirement vehicle of the future. Education and Labor Committee Hearing Statements Hedge Funds Continue to be a Focus in 110th Congress: Bush Administration Advises Caution, but Hearings, GAO Study in the Works
On February 22, 2007, the President’s Working Group on Financial Markets, chaired by Treasury Secretary Hank Paulson, released the results of its most recent 11-month study of the hedge fund industry. According to this review, “The current regulatory structure …is working well.” The Working Group, which includes the heads of the Federal Reserve, the SEC and the Commodity Futures Trading Commission (CFTC), therefore did not recommend any new regulations. Instead, it released a set of principles and guidelines that are intended to provide guidance for U.S. financial regulators as they address public policy issues associated with the rapid growth of hedge funds. These principles, while recognizing that hedge funds present challenges for market participants and policymakers, generally leave investor protection and systemic risks to the care of “market discipline, participant awareness of risk, and prudent risk management.” However, it was also suggested that direct investment in such pools be limited to more sophisticated investors who, the guidelines recommend, “should obtain accurate and timely historical and ongoing material information necessary to perform due diligence regarding the pool’s strategies, terms, conditions, and risk management,” thereby enabling them to make informed investment decisions. Specifically addressing pension funds, the guidelines recommend that any concerns that “less sophisticated investors are exposed indirectly to private pools through holdings of pension funds, fund-of-funds, or other similar pooled investment vehicles can best be addressed through sound practices on the part of the fiduciaries that manage such vehicles.” Hedge funds should help in this process by making relevant, accurate, and timely historical and ongoing material information readily available, according to the guidelines. However, it is the inability to obtain this very kind of information that has so many members of Congress and investors themselves concerned with existing hedge fund regulation. For example, at a recent Institutional Fund Management Conference in Geneva, Switzerland, the head of allocation and research at the largest European pension fund was reported as decrying the lack of transparency of hedge funds, complaining that it was almost impossible to determine what portion of fund returns are attributable to the skills of the funds’ managers and what simply were the result of market gains. Others complained about paying high fees for Market-like returns. On Capitol Hill, such a lack of hedge fund transparency has also been a cause of frustration. When Amaranth Advisors collapsed last year, Senator Chuck Grassley (R-IA), currently the ranking Republican on the Senate Finance Committee, became concerned about the impact that Amaranth’s collapse could have on public and private pension funds. However, when he asked his staff to report back to him on major pension fund holdings in Amaranth, the information was not available either through public records or even through the various Federal agencies that oversee the financial and energy markets. The Senator was quick to express his frustrations. Senator Grassley continues to be concerned about hedge funds. Recently he joined together with the now-Chairman of the Finance Committee, Max Baucus (D-MT), in requesting that the GAO investigate the extent to which public and private sector pension systems are investing in hedge funds and the role of regulators in overseeing such investments. In their letter, the two powerful Senators expressed “particular concern” with “the extent to which under-funded plans sponsored by financially weak employers may be investing in hedge funds in an attempt to quickly build plan assets, thereby exposing the plan, plan participants, and potentially PBGC and the taxpayer, to greater financial risk.” Among other things, the letter asks GAO how pension plan sponsors evaluate which hedge fund to invest in, and what mechanisms exist to monitor pension fund asset allocation to ensure their investment in hedge funds is prudent. "If the folks running retirement plans don't have the facts about hedge funds, we could end up with the blind leading the broke," said Senator Baucus. "We need to know whether hedge funds are risky business or real asset builders for retirement," he stressed. On the other side of Capitol Hill, the House Financial Services Committee is also moving forward with the first of what it anticipates are a number of hearings to be held on the issue of hedge funds. The first is scheduled for March 13, 2006. Committee Chairman Barney Frank has said in the past that more regulation is needed, but in recent days has been more open to “fact finding,” which is what his staff says will be the purpose of the upcoming hearings. However, in has also been reported that Chairman Frank recently told editors of The New York Times that he sees “some restriction on the pension fund-hedge fund interaction” in the future. Finally, to round out the review of activities dealing with hedge funds in Washington, DC, reports are that the responses to the SEC’s proposed new rule dealing with hedge funds, designed to protect individual investors, have been overwhelmingly negative – and almost all from individual investors. Part of the new proposed rules are in response to last year’s court ruling that blocked the SEC’s effort to require certain hedge fund advisers to register with the SEC. (See July 2006 NCTR Federal E-news) The new rule would prohibit advisers to investment companies and other pooled investment vehicles from (i) making false or misleading statements to investors in those pools, or (ii) otherwise defrauding them. The SEC would enforce the rule through administrative and civil actions against advisers. However, this is not what is raising the hackles of so many individual investors. The SEC’s new rules would also essentially increase the minimum amount of investible assets needed to invest in hedge funds from $1 million to $2.5 million. This will not in all likelihood affect large hedge funds, most of whose investors can satisfy this new level. But “smaller” investors are not happy! In short, hedge funds continue to be a highly charged subject, and their links to pension funds remain a major concern of key members of the House and Senate. Legislation in this area is therefore very likely in the 110th Congress. President's
Working Group on Financial Markets New Executive Compensation Legislation Introduced; Hearings in House
Chairman Barney Frank introduced H.R. 1257, the "Shareholder Vote on Executive Compensation Act," on March 1, 2007. The bill currently has 27 cosponsors, including 21 of the Financial Services Committee’s 36 Democratic members; no Republicans yet to add their names to the bill. The bill, very similar to legislation that Mr. Frank introduced in the last Congress, does not set any limits on pay, but provides shareholders with the opportunity to express their approval or disapproval of the compensation of executives as disclosed pursuant to the SEC's new compensation disclosure rules. (See August 2006 NCTR Federal E-news) The legislation makes it explicitly clear that the shareholder vote would not be binding on the board of directors, nor could it be “construed as overruling a decision” by a board. The bill also contains a separate advisory vote if a company gives a new, not yet disclosed, "golden parachute" while simultaneously negotiating to buy or sell a company. So-called “say on pay” advisory votes on compensation are used in the United Kingdom, and have reportedly not proven to be problematic. (The UK approach allows shareholders to bring nonbinding confidence or no-confidence votes on reported executive pay, letting shareholders either ratify or reject the pay package an executive has already received.) As Chairman Frank explained in his introductory remarks, "I do not understand those who argue that the people who make up our stock markets are collectively very wise, but at the same time are somehow incapable of rendering a coherent opinion of what they should pay those they employ to run the corporations that they own." However, critics of the legislation argue that Congress should wait to see how the SEC’s executive pay disclosure rules work out. Others note that increased access to the proxy, which has come in the wake of the SEC’s continued deferral of action in response to the AFSCME v. AIG lawsuit (See November 2006 NCTR Federal E-news) has opened the door for such votes without the need for Federal legislation. For example, an Institutional Shareholder Services report recently found that this year, there are currently 47 proposals pending to provide an advisory vote on executive compensation. This number is a substantial increase compared to the 2006 proxy season. Congressman Frank believes that the SEC action was “a good step forward.” Nevertheless, while disclosure is important, he believes that it is ultimately incomplete without giving shareholders a say on their company's executive compensation disclosures. This can be done, he believes, without “micromanaging” the business. The House Financial Services Committee’s hearing will receive testimony from Nell Minow, Editor, The Corporate Library; Lucian Bebchuk, Professor, Harvard Law School; Stephen M. Davis, Fellow at Millstein Center for Governance and Performance; Richard Ferlauto, Director of Pension and Benefit Policy, AFSCME; Steven N. Kaplan, Neubauer Family Professor of Entrepreneurship and Finance University of Chicago Graduate School of Business; and John J. Castellani, President, Business Roundtable. Legislation Aimed at “Pay-to-not-Play”
Deals Between Branded Drug Companies and Generic Manufacturers Advances
in Senate In some cases in which generic companies ask a court to invalidate drug patents held by brand-name manufacturers before they expire, the companies reach settlements that involve payments to the generic company in exchange for an agreement not to enter the market with an unbranded - and less expensive - alternative to the drug in question. The Federal Trade Commission (FTC) had been authorized to police such settlement agreements to prevent collusion, but in 2005, two appellate court decisions reversed the FTC’s actions and upheld settlements that include pay-offs by brand-name pharmaceutical manufacturers to generic manufacturers designed to keep generic competition off the market. Consequently, more than two-thirds of the approximately ten settlement agreements made in 2006 include a pay-off from the brand manufacturer in exchange for a promise by the generic company to delay entry into the market. Last summer, the U.S. Supreme Court refused to hear an appeal of these rulings that was requested by the FTC (See July 2006 NCTR Federal E-news) Legislation was subsequently introduced to restore the FTC’s authority, but did not advance in the last Congress. Now, however, a bill (S. 316) introduced by Senators Kohl (D-WI), Grassley (R-IA), Schumer (D-NY), Feingold (D-WI), Kennedy (D-MA), Durbin (D-IL) and Judiciary Committee Chairman Leahy (D-VT) has been the subject of a January hearing and was reported by the full Judiciary Committee to the Senate on February 15th for further action. At the Judiciary Committee’s January hearing, FTC Commissioner Jon Leibowitz continued to champion the need for remedial legislation, and FTC Chairman Deborah Majoras told the Committee on March 6, 2007, that these anticompetitive patent settlements “present one of the greatest threats American consumers face today.” Chairman Leahy stated clearly that “Congress never intended for brand-name drug companies to be able to pay off generic companies NOT to produce generic medicines.” Such action, he declared, would be “a shame, harmful to consumers, and a crime.” However, Billy Tauzin, chief executive officer of the Pharmaceutical Research and Manufacturers of America (PhRMA), warned that blanket prohibitions on certain types of settlements “could force both sides to spend valuable resources litigating their patent dispute to judgment." A total ban on settlements “could stop pro-consumer settlements, reduce the value of patents, and reduce incentives for innovation," Tauzin stated. The unintended consequence could be to reduce generic companies' incentives to challenge patents in the first place, since their options for settling would be reduced, PHARMA asserts. S.
316, the “Preserve Access to Affordable Generics Act”
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