The Federal Trade Commission has broadened the rules dictating when pharmaceutical companies must report a transfer of exclusive patent rights to the U.S. Department of Justice and FTC for antitrust review and approval. Under the Hart-Scott-Rodino Act, the sale of a patent is a potentially reportable transaction if it meets the Act’s notification thresholds, known as the "size of person" and "size of transaction" tests. In the past, the FTC required parties to potentially report only those license agreements that transferred the exclusive rights to "make, use and sell" the patented product. The FTC considered arrangements where the patent holder retained manufacturing rights to be a nonreportable distribution agreement rather than an asset transfer subject to the Act. Not surprisingly, patent holders often transferred most but not all of the rights to their inventions for the purpose of avoiding the "make, use and sell" trigger for filing under the Act.

The Rule

On November 6, 2013, the FTC finalized amendments to the Act’s premerger notification rules and published regulations directing pharmaceutical companies to notify the FTC when they grant an exclusive licensee "all commercially significant rights" – defined 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)" – to use a patent or part of one, even if the licensor retains the manufacturing rights. Similarly, a licensor’s retention of co-rights also constitutes the grant of "all commercially significant rights" when the co-rights do not include the right of the licensor to commercially use the patent wholly or partially. The FTC explains that such grants trigger antitrust review because "an exclusive license is substantively the same as buying the patent or part of the patent outright, and carries the same potential anticompetitive effects."  The FTC believes that the newly expanded rule better captures the type of patent license agreements that should be subject to the Act.

The newly expanded rule ostensibly applies only to pharmaceutical licensing agreements, specifically, patents related to products generating revenue in the following areas: medical and botanical manufacturing, pharmaceutical preparation manufacturing, in vitro diagnostic substance manufacturing, and biological product (except diagnostic) manufacturing.

The newly expanded rule was published in the Federal Register on November 15, 2013, and will become effective on December 15, 2013.

The Effect

While the FTC maintains that the only difference between the old and new rules is to subject a patent owner’s decision to retain manufacturing rights or certain "co-rights" to the reporting requirements of the Act, the definitions and examples contained in the agency’s pronouncement do not support such a narrow construction. For example, a licensor that retains all rights to a drug for use in humans but grants a license to use that drug in other animals will be considered to have given an exclusive license to use all commercially significant rights for purposes of the Act, because, according to the FTC, the licensee is "receiving all rights to the patent for a therapeutic area." Thus, it is likely that pharmaceutical companies will have to determine whether the transfer of a license triggers the Act’s reporting requirements. This may result in smaller companies not engaging in these types of transactions, due to added costs, legal fees and the 30-day waiting period required by the Act.

Moreover, notwithstanding the FTC’s claim to the contrary, it is not clear whether the FTC intends to limit its review of exclusive patent license transfers solely to the pharmaceutical industry. The FTC justifies the application of the rule exclusively to the pharmaceutical industry because it claims that this is the only industry "in which exclusive patent licenses are prevalent." However, similar licenses are prevalent in other industries, such as the information technology industry. The FTC enigmatically addresses this fact by stating that if it "finds that such arrangements occur in other industries, the Agencies can then assess the appropriateness of a similar rule for those other industries." The FTC goes on to create more confusion about the application of the new rules to non-pharmaceutical industries by stating that even "in the absence of a specific rule concerning other industries, however, such exclusive patent licenses remain potentially reportable."