FTC Finalizes Amendments To HSR Rules Regarding Transfer Of Exclusive Patent Rights In The Pharmaceutical Industry


The Federal Trade Commission (FTC) has finalized certain amendments to the Hart-Scott-Rodino (HSR) premerger notification regulations clarifying the scope of reportable transactions involving transfers of patent rights in the pharmaceutical industry.1 The final version of the rule is identical to that originally proposed in August 2012.

The Background

Generally, HSR filings are required for certain size acquisitions of voting securities, assets, or controlling shares of non-corporate interests. The FTC has always treated patents as assets, requiring HSR filings for acquisitions of patents valued in excess of the applicable jurisdictional thresholds. Traditionally, exclusive licenses of patents, in their entirety or for a particular field of use, indication, or geography, also have been treated as asset acquisitions. More recently, certain complexities in licenses related to pharmaceuticals, including (1) licensors retaining the right to co-develop, co-promote, co-market, or co-commercialize the product along with the licensee and (2) the licensor retaining the right to manufacture for exclusive sale to the licensee, have raised concern at the FTC.

The amendment addresses when a patent license will be treated as exclusive and, therefore, a reportable transfer of an asset. Historically, whether a transfer of rights to a patent was deemed an asset acquisition turned on whether the license granted the licensee the exclusive right to “make, use and sell.” Under the old rule, if a licensor retained the right to manufacture under the patent, but granted the rights to use and sell, the transaction was nonreportable. The FTC viewed such a limited transfer as, essentially, a distribution agreement rather than an asset sale.

The Amended Rule

Under the amended rule, whether a license transfers all rights to “make, use and sell” is no longer determinative. Instead, the applicable test will be whether a pharmaceutical patent license transfers “all commercially significant rights.” The principle change in reportability is that an HSR filing will be required for exclusive licenses, where the licensee retains the right to manufacture solely for the licensee, if the applicable size-of-person and size-of-transaction tests are satisfied.

The FTC has concluded that the right to manufacture, under a pharmaceutical and biological patent, is far less competitively significant than the right to commercialize. Pharmaceutical companies often enter into licenses in which the licensee receives the exclusive right to use and sell under the license, but the licensor retains the right to manufacture exclusively for the licensee. Because the licensor is manufacturing solely for the use of the licensee, the FTC has determined that such transfers are substantively the same as granting the licensee the exclusive right to manufacture, use and sell the products.

Under the amended rule, commercially significant rights are defined as the exclusive patent rights to use the patent in a particular therapeutic area or in a specific indication within a therapeutic area. The “all commercially significant rights” test focuses on whether the licensee receives the exclusive rights to commercially use the patent and receive the right to generate revenues from those exclusive patent rights, even if some of those profits will be shared with the licensor through royalties or other revenue-sharing terms.

Importantly, with the exception of the treatment of the right to manufacture exclusively for the licensee, the amended rule treats the reportability of exclusive license agreements, including those where the licensor retains “co-rights,” in the same way as the FTC has in the past. Exclusive patent transfers over a certain size remain reportable even when the licensor retains certain co-rights to co-develop, co-promote, co-market, or co-commercialize the exclusively licensed patent.

The FTC noted that when the licensor retains co-rights, typically only the licensee can use the patent rights as it works to gain FDA approval for the pharmaceutical product, and any royalty stream or other revenue-sharing mechanism flows from this exclusivity. Even though the licensee and licensor will share the eventual profits, the profits result from a reportable transfer to the licensee of the exclusive right to use the patent. This approach will not change under the proposed “all commercially significant rights” concept. Whether a license constitutes an asset transfer does not turn on the type, magnitude or scope of the co-right retained, but on whether the exclusive patent license allows only the licensee to commercially use the patent or part of the patent.

Many Exclusive Licenses will Remain Not Reportable

Even where the license is treated as an asset acquisition, often early-stage pharmaceutical collaborative licensing arrangements do not meet the HSR jurisdictional thresholds. An exclusive patent license will only be reportable if the $14.2 million (adjusted annually) size-of-person and the $70.9 million (adjusted annually) size-of-transaction thresholds established by the HSR Act are satisfied. Many times one of the parties to the license is a smaller firm that does not meet the size-of-person test (often times the licensor is a small company with limited assets and no sales) and the fair market value of the license at issue does not exceed the above size-of-transaction test. The HSR rules regarding valuation of the payments contemplated by such licenses often result in exclusive license values under the size-of-transaction threshold.2 For example, because of the substantial uncertainty of reaching later-stage milestones triggered by achieving new phases in clinical trials and new drug applications, in some cases such milestones can be discounted to zero.

The purpose of the amendment is to permit the FTC and the U.S Department of Justice an opportunity to review licenses, before they have been entered into, that they believe could have the same competitive effect that a straightforward transfer of the patent would have. Even though the treatment of licenses where licensees retain co-rights will not change, as a result of the new rule, parties entering into exclusive licenses whereby the licensor retains the right to manufacture the patented product for sale exclusively to the licensee will need to consider carefully whether their licensing arrangement triggers an HSR filing and how the complex pharmaceutical licensing valuation principles apply.


1 The amended rule applies to pharmaceutical licenses only. The FTC will consider all other exclusive licenses, including those for medical devices, on a case-by-case basis.

2 Of course, even transactions that fall below the HSR jurisdictional tests are subject to review by the FTC or Department of Justice (DOJ), Antitrust Division. See, e.g., FTC v. Solera / Actual Systems (FTC enters into consent decree related to $8.7 million acquisition); United States v. Bazaarvoice / PowerReviews (DOJ sues to unwind non-reportable transaction).


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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