FTC Expands the Scope of Pharmaceutical Licensing Transactions That Will Be Subject to Premerger Review

The Federal Trade Commission (FTC) recently announced that it has finalized amendments to the premerger notification rules (HSR Rules) that provide a framework for determining when a transaction involving the transfer of rights to a pharmaceutical patent is a potentially reportable asset acquisition under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).1 The new rule in large part codifies the FTC Premerger Notification Office's (PNO's) long-standing position that transactions involving the transfer of exclusive patent rights are treated as asset acquisitions under the HSR Act (and thus are subject to premerger notification requirements). However, the "all commercially significant rights" approach established by the new rule deviates from the existing PNO approach in its treatment of retained manufacturing rights and applies solely to the pharmaceutical industry.

Under the new rule, the transfer of exclusive rights to a pharmaceutical patent in a particular therapeutic area or for a specific indication constitutes an asset acquisition even if the patent holder retains limited manufacturing rights and/or co-rights. This amendment potentially will result in an increase in licensing transactions that will be subject to HSR notification requirements (which include filing fees and waiting periods before the transactions can close).

"Make, Use, and Sell" Approach Under Existing PNO Guidance

Generally, under the HSR Rules, acquisitions of assets, voting securities, or controlling non-corporate interests that exceed the applicable size-of-transaction (currently $70.9 million) and size-of-persons thresholds require notification under the HSR Act, unless an exemption applies. For the transfer of exclusive patent rights, the PNO has long viewed the transfer of such rights as a potentially reportable HSR asset acquisition. This policy, reflected in guidance given by the PNO in numerous "informal interpretations," applies to any exclusive transfer of intellectual property rights, regardless of industry or subject matter. Prior PNO guidance has focused on whether the rights to make, use, and sell under the patent are being transferred exclusively to the licensee. The exclusive transfer of this bundle of rights is considered to be a potentially reportable transaction even if the transfer is limited to a particular field of use, period of time, or geographic area.

If the licensor retains the right to license the patent to others for the same field of use, geographic area, and time period as granted to the licensee, then the license is not considered sufficiently exclusive for HSR purposes, and thus not an asset acquisition. The license may also not be considered sufficiently exclusive if the licensor retains for itself certain other rights to the patent. For example, the retention of manufacturing rights has generally been sufficient to render an otherwise exclusive licensing arrangement non-exclusive even if the grantor has no intent to manufacture the product. On the other hand, merely retaining the right to co-develop, co-promote, or co-market a product has in most instances not been sufficient in the PNO's view to render an otherwise exclusive license non-exclusive for HSR purposes.

"All Commercially Significant Rights" Approach Under the New Rule

Under the new rule, a license or other transfer of patent rights to a pharmaceutical product will amount to an asset acquisition if all commercially significant rights to the patent are conveyed by the transferor to the transferee. The transfer of all commercially significant rights means that the transfer of exclusive patent rights allows only the recipient of such rights to use the patent—whether as a whole or in part—in a particular therapeutic area or for a specific indication. Such a transfer will remain potentially reportable even if the licensor retains (a) limited manufacturing rights (i.e., the right to manufacture the products covered by the patent solely for the licensee) or (b) co-rights (i.e., shared rights retained by the licensor to assist the licensee in developing and commercializing the product covered by the patent, including rights related to co-development, co-promotion, co-marketing, and co-commercialization).

Limitation to Pharmaceutical Industry and Application to Other Industries

The "all commercially significant rights" test will apply only to transactions involving patents covering products whose manufacture and sale would generate revenues in NAICS Industry Group 3254. This industry group includes finished pharmaceutical products, active pharmaceutical ingredients, biologics, and in-vivo and in-vitro diagnostic substances. Exclusive licensing transactions relating to other types of products nevertheless remain potentially reportable asset acquisitions under the HSR Act. It is not clear whether the PNO will analyze exclusive licenses in other industries under the "make, use, and sell" or "all commercially significant rights" approach. Therefore, consultation with PNO staff may be required for such transactions.

FTC's Rationale for Rule Change

The FTC has observed that in recent years it has become more common in the pharmaceutical industry for licensors to grant licensees exclusive patent rights but retain the right to manufacture solely for the licensee. Under the "make, use, and sell" approach, the retention of manufacturing rights would render the license non-exclusive even though the arrangement has the same effect as a transfer to the licensee of all patent rights. As such, the FTC determined that the "make, use, and sell" approach is no longer adequate in evaluating the reportability of patent rights transfers in the pharmaceutical industry.

The FTC's purported rationale for limiting the rule to the pharmaceutical industry is that the PNO does not see exclusive transfers of patent rights in other industries. According to the FTC, all exclusive licensing arrangements notified for the calendar years 2008-2012 involved pharmaceutical patents and requests for guidance on the treatment of exclusive patent licensing transactions have generally been limited to the pharmaceutical industry.


The new rule expands the application of the HSR Act to exclusive transfers of pharmaceutical patent rights where the transferor retains limited manufacturing rights. The FTC estimates that this rule change will result in the notification of approximately 30 more transactions per year. This is a substantial increase, given that only 66 exclusive licensing transactions were notified for calendar years 2008 through 2012 (i.e., on average, approximately 13 annually).

The effective date for the new rules is 30 days after the date of publication in the Federal Register, which is expected to occur later this week. Thus, any parties considering transactions involving the transfer of rights to a patent in the pharmaceutical industry that are expected to close in December or thereafter should consult antitrust counsel to determine whether the rule change will affect the reportability of the transactions.

1 See "FTC Finalizes Amendments to the Premerger Notification Rules Related to the Transfer of Exclusive Patent Rights in the Pharmaceutical Industry," (Nov. 6, 2013), available at http://www.ftc.gov/opa/2013/11/pmn.shtm.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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