More Pharmaceutical Industry Transactions Must Be Reported to the FTC and DOJ Under the New FTC Premerger Notification Rules on the Transfer of Exclusive Patent Rights

Authored by Robert C. MacKichan III, D. Brian Kacedon, and John C. Paul

On November 6, 2013, the Federal Trade Commission issued a final rule amending the premerger notification regulations that implement the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"). The final rule, effective December 16, 2013, clarifies when a party must report a transaction to the FTC and the Department of Justice involving the transfer of rights to all or part of a patent in the pharmaceutical industry. The rule addresses the evolving nature of pharmaceutical licenses, where the licensor may retain limited rights to manufacture for the licensee or rights to assist in the development and commercialization of the licensed product. While the FTC limited the new rules to the pharmaceutical industry, it noted that similar licenses in other industries may be potentially reportable under existing rules.¹

Background

The HSR Act requires that asset acquisitions above certain value thresholds, and between parties of certain sizes, be reported to the FTC and the Department of Justice. Under the existing premerger notification regulations, acquisitions of exclusive patent licenses are potentially reportable if they meet an informal "make, use, and sell" test. Under that test, if the acquiring party obtains exclusive rights to use all or part of a patent to develop a product, manufacture the product, and sell the product without restriction, the acquisition requires reporting (so long as the transaction meets other criteria, such as the threshold minimum value). As the FTC found, however, recent pharmaceutical transfers often involve the licensor's transferring most, but not all, rights to "make, use, and sell" by, for example, retaining the right to manufacture under the patent, but only for the licensee. In such a case, the transaction need not be reported even though the licensor would not be manufacturing for its own commercial use. The FTC also noted an increasing frequency of licenses in which the licensor retains the right to codevelop, copromote, comarket, and cocommercialize the product to assist the licensee—a case not precisely addressed by the "make, use, and sell" test, but long treated as not rendering a license nonexclusive.

All Commercially Significant Rights

The final rule, to be codified at 16 C.F.R. § 801, introduces an "all commercially significant rights" test for determining when an exclusive patent license in the pharmaceutical industry potentially requires reporting under the HSR Act. Under the test, the transfer of exclusive rights to all or part of a patent is a potentially reportable asset transfer if it allows only the recipient to commercially practice all or part of the patent in a particular therapeutic area or a specific indication within a therapeutic area. The test focuses on whether the licensee receives the exclusive right to generate revenue from the exclusive rights transferred, even when some of the profits are shared with the licensor through royalties or other revenue-sharing arrangements. In the amendment, the FTC leaves the terms "indication" and "therapeutic area" undefined. According to the FTC, these terms alone provide sufficient guidance to the pharmaceutical industry.

In addition, the final rule expressly addresses limited manufacturing rights, defined as the right to manufacture the patented product "solely to provide the recipient of the patent rights with the product(s) covered by the patent (which either the patent holder alone or both the patent holder and the recipient may manufacture)." The rule provides that commercially significant rights are transferred even if the patent holder retains such limited manufacturing rights. In its notice, the FTC reasoned that such limited manufacturing arrangements have the same effect as a transfer to the licensee of all patent rights. The FTC also distinguished "limited manufacturing rights" from exclusive distribution agreements—common in industries outside of pharmaceuticals—in which the licensor retains not just the right to manufacture, but all commercially significant rights to the patent such that no potentially reportable asset acquisition takes place. According to the FTC, "limited manufacturing rights" agreements occur almost exclusively in the pharmaceutical industry.

The final rule also provides that all commercially significant rights transfer even if the patent holder retains "co-rights," defined as "shared rights retained by the patent holder to assist the recipient of the exclusive patent rights in developing and commercializing the product covered by the patent." The rule applies regardless of the kind, magnitude, or scope of the corights retained. Even though the licensee and licensor will share eventual profits, explains the FTC, the licensee is still the only party allowed to commercially use the patent or part of the patent.

Strategy and Conclusion

The FTC explained that its rulemaking should address the evolving structure of exclusive patent licenses in the pharmaceutical industry and actually achieve what it believed the informal "make, use, and sell" test never truly could—determining whether a license transferred an exclusive right to practice all or part of a patent. As the FTC explained in its notice, the final rule has the effect of treating the potential reportability of exclusive licensing arrangements the same as they have been for decades, with the exception of limited manufacturing rights. Thus, the main impact of the new rule will be to bring exclusive licenses with limited manufacturing agreements under the scope of the HSR Act.

The FTC limited the final rule to the pharmaceutical industry, reasoning that it was the only industry to use the unique licenses requiring such changes and clarifications. The FTC said that if these arrangements begin to emerge in other industries, however, the appropriateness of a similar rule can be assessed. But in the meantime, the FTC did not rule out the potential reportability of any such exclusive patent licenses under the existing rules.

Endnotes
¹ The Federal Register notice and text of the finalized amendment are available at https://www.federalregister.gov/articles/2013/11/15/2013-27027/premerger-notification-reporting-and-waiting-period-requirements.

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