FTC Proposes Amendments to the Premerger Notification Rules Related to the Transfer of Exclusive Patent Rights in the Pharmaceutical Industry

Amendments Would Expand the Scope of
Exclusive Rights Transfers That May Be Reportable

August 20 , 2012

On August 13, 2012, the Federal Trade Commission (“FTC”) published a notice of proposed rulemaking, setting forth proposed amendments to the Hart-Scott-Rodino (“HSR”) Premerger Notification Rules (the “Rules”) aimed at clarifying – and effectively expanding – the scope of transactions involving the transfer of rights to a patent in the pharmaceutical, biologics, and medicine manufacturing industries that may be subject to the notification and waiting period requirements of the HSR Act.  The amendments would not alter the scope of transactions potentially reportable under the HSR Act in any other industry, including technology industries.  Parties dealing with exclusive patent rights transfers in other industries are encouraged to consult the Premerger Notification Office of the FTC (“PNO”) on a case-by-case basis.  Public comments to the proposed Rules will be accepted until October 25, 2012.

The HSR Act requires parties to mergers and acquisitions of assets and/or voting securities that exceed certain jurisdictional thresholds to make filings with the FTC and Department of Justice, Antitrust Division (“DOJ”) and to observe a waiting period before closing, during which the antitrust agencies may conduct an initial review of a transaction.  While patents have always been viewed as “assets,” it has not always been clear when an exclusive patent license qualifies as an acquisition of an asset for HSR filing purposes.

The PNO previously analyzed intellectual property transactions of this type by focusing on whether the exclusive rights to “make, use and sell” under a patent were being transferred.  Only when the full bundle of rights was transferred did the PNO view the transaction as a transfer of an “asset” potentially reportable under the HSR Act.  Specifically, if a licensor retained the right to manufacture a product or compound, even if exclusively for the licensee, the PNO viewed the transaction as akin to a non-reportable distribution agreement rather than an asset acquisition.

The proposed amendments specifically change this view and would require reporting under the HSR Act of exclusive patent rights transfers, even when the licensor retains certain manufacturing and/or co-development, co-promotion, and co-marketing rights.  The amendments are summarized below.

Concept of “All Commercially Significant Rights”

As proposed, the transfer of patent rights will constitute an asset acquisition potentially reportable under the HSR Act if “all commercially significant rights” to a patent “for any therapeutic area (or specific indication within a therapeutic area)” are transferred.  The term “all commercially significant rights” is defined in the amended Rules as “the exclusive rights to a patent that allow only the recipient of the exclusive patent rights to use the patent in a particular therapeutic area (or specific indication within a therapeutic area).” 

A therapeutic area would cover the intended use of a patent, such as for cardiovascular or neurological use, and include all indications.  An indication would cover a segment of a therapeutic area; the FTC’s notice provides the example of Alzheimer’s disease within the neurological therapeutic area.

The transfer of “all commercially significant rights” to a patent would be a potentially reportable event regardless of whether the transfer is called an exclusive license, assignment, or something else.

Limited Rights Retained by Patent Holder

The proposed amendments make clear that “all commercially significant rights” are transferred even when the patent holder retains what is further defined as “limited manufacturing rights” and/or “co-rights.”

The term “limited manufacturing rights” means rights retained by the patent holder to manufacture the product(s) covered by a patent when all other exclusive rights have been transferred, and “solely to provide the recipient of the patent rights with product(s) covered by the patent.”

Therefore, the amendments would treat as a potentially reportable asset acquisition the grant of an exclusive license to use and sell a product where the licensor retains the right to manufacture exclusively for the licensee.  The published examples to the proposed Rules also clarify that a transaction may still be reportable even if a licensor retains the right to manufacture the same licensed compound or product for use by a third party in a different therapeutic area.  If a licensor agrees to manufacture solely for the use of the licensee, this agreement would be viewed as substantively the same as an agreement giving the licensee the exclusive right to manufacture, use, and sell the product(s) covered by the license.

Similarly, a transfer of patent rights may be reportable even when the patent holder retains other “co-rights,” either alone or in combination with “limited manufacturing rights.”  “Co-rights” cover shared responsibility for shepherding a product through Food and Drug Administration approval, and include “co-development, co-promotion, co-marketing, and co-commercialization.”  Under existing PNO policy, the retention of these rights does not alone render a license non-exclusive, and so the portion of the amendments defining co-rights and stating their effect on HSR reporting obligations is a codification of the PNO’s current approach.

Exclusive distribution agreements, under which a party receives no exclusive patent rights and is only handling the logistics of distributing an approved pharmaceutical product, are still not reportable under the HSR Act.

Effect of the Amendments

According to the FTC, the proposed amendments will both clarify for the business community the analysis of whether or not a transfer of patent rights in the pharmaceutical industry is HSR reportable and provide the FTC and the DOJ a better opportunity to review such transactions for competitive concerns.  The FTC estimates that the proposed amendments will result in approximately 30 new HSR filings per year.

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