Under New HSR Rules, More Licenses in the Pharmaceutical Industry Likely Will Be Reportable

On November 6, 2013, the Federal Trade Commission (FTC or Commission), with the concurrence of the Assistant Attorney General, Antitrust Division, Department of Justice, amended the Hart-Scott-Rodino Rules to provide a framework for determining when a transaction that transfers rights to a patent or part of a patent involving pharmaceuticals, including biologics, requires notification under the Hart-Scott-Rodino Act (HSR Act).1 The amendments only apply to license agreements in the pharmaceutical industry; however, the concepts set forth in the rules are applicable to license agreements in other industries as well. The amended rules will be effective 30 days after they are published in the Federal Register.2

The amendments codify the long-standing informal interpretation of the FTC’s Premerger Notification Office (PNO) that an exclusivelicense that transfers rights to a patent or part of a patent is the transfer of an asset subject to the HSR Act notification requirements. More important, the amendments also provide a new framework for determining when a license in the pharmaceutical industry will be deemed to be an exclusive license, and therefore, the transfer of an asset. For many years, the PNO had advised that a license is exclusive if the license transfers the rights under the patent, in whole or in part, to “make, use, and sell,” i.e., to develop a product, manufacture a product, and sell the product without restriction. The Commission has determined that changes in exclusive licensing within the pharmaceutical industry have made the “make, use, and sell” analysis inadequate to evaluate whether the transfer of rights to a patent, in whole or in part, qualifies as an exclusive license.

The Commission has adopted a new framework for the analysis that applies the concept of “all commercially significant rights” to determine when the transfer of rights is an exclusive license, and therefore potentially reportable as the transfer of an asset. The concept of “all commercially significant rights” focuses on “whether the licensee receives the exclusive right to commercially use the patent” for a particular field of use, therapeutic area, or indication. Under this test, a license is not rendered non-exclusive if the licensor retains “limited manufacturing rights” (i.e., the right to manufacture exclusively for the licensee) or “co-rights” (i.e., shared rights retained to assist the licensee in developing and commercializing the product covered by the patent). On the other hand, if the licensor retains the right to commercially use the patent, or part of the patent, for the same field of use, therapeutic area, or indication, then the license is not exclusive.

The concept of “limited manufacturing rights” reverses the long-standing informal interpretation of the PNO, which previously stated that if the licensor retained the right to use the patent to manufacture exclusively for the licensee, then the license was deemed to be non-exclusive and not the transfer of an asset. The new rules provide that even if the licensor retains the right to manufacture exclusively for the licensee, the license still would be an exclusive license.

The new rules’ treatment of co-rights (i.e., shared rights to co-develop, co-promote, and co-commercialize a product) reflects the long-standing position of the PNO that where a licensor grants an exclusive license the retention of these rights is not enough to avoid reporting the transaction as an asset acquisition. Licensors typically retain co-rights in order to assist the licensee in developing a commercially viable product, thereby maximizing the product’s sales and related royalties. The retention by the licensor of the right to commercially use the patent, or part of the patent, for the same field of use or indication is not a co-right and is treated as the grant of a non-exclusive license.

The new rules also clarify that in the pharmaceutical arena, the transfer of all significant commercial rights to a patent in a particular therapeutic area, or specific indication within a therapeutic area, is the transfer of an asset and potentially reportable. This is consistent with the PNO long-standing informal interpretations that the grant of exclusive rights to use a patent for a specific field of use is an asset acquisition.

The Commission estimates that the new rule will result in about 30 additional transactions requiring HSR notification annually. This is a significant increase because for the five-year period ending December 31, 2012, the PNO had received HSR notifications for only 66 transactions involving exclusive patent licenses in the pharmaceutical area.

In light of the new rules, pharmaceutical companies may need to adjust their patent licensing practices and be cognizant that some patent license transactions that previously were not reportable, now will require HSR notification, with the attendant burdens of filing fees and waiting periods as well as the potential for substantive review by the FTC.

Endnotes    (↵ returns to text)
  1. FTC press release “FTC Finalizes Amendments to the Premerger Notification Rules Related to the Transfer of Exclusive Patent Rights in the Pharmaceutical Industry” dated November 6, 2013, available at http://ftc.gov/opa/2013/11/pmn.shtm.
  2. See, text of the Federal Register notice, available at http://ftc.gov/os/2013/11/131106premergerfrn.pdf.

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