FTC Issues Premerger Notification Review Changes for Pharmaceutical Patent License Transfers

The Federal Trade Commission (FTC) issued final changes to the premerger notification rules to expand the circumstances that require pharmaceutical industry companies to report proposed acquisitions of exclusive patent rights to the FTC and the Antitrust Division of the Department of Justice (DOJ) for antitrust review under the Hart-Scott-Rodino (HSR) Act. In practice, the revised rules will increase the FTC’s ability to scrutinize exclusive patent licensing agreements in the pharmaceutical industry. The revised rules will become effective 30 days after publication in the Federal Register.

The HSR Act requires filings to be made with the FTC and DOJ for certain mergers and acquisitions of assets, voting securities, and non-corporate interests that exceed specific monetary thresholds (currently $70.9 million). Patents and exclusive patent licenses have traditionally been considered “assets” under the HSR Act.

For years, the FTC permitted practitioners to use the “make, use, and sell” approach to determine the reportability of licenses. This meant the transfer of a patent license was reportable only if it involved the exclusive right to use a patent (or part of a patent) to develop a product, manufacture the product, and sell that product without restriction.

According to the FTC, pharmaceutical companies in recent years began transferring most but not all of the rights to “make, use, and sell” under a license, avoiding agency notification and review under the HSR Act. For example, under the “make, use, and sell” approach, if a licensor retained the right to manufacture patent-covered products for the licensee, the transaction would be non-reportable.

The revised rules do away with the “make, use, and sell” approach, adopting the “all commercially significant rights” test. This test provides that the transfer of exclusive rights to a patent or a part of a patent in the pharmaceutical industry is a reportable asset transfer if it “allow[s] only the recipient of the exclusive patent rights to use the patent in a particular therapeutic area (or specific indication within a therapeutic area).”

In addition, the revised rules explain that a transfer of “all commercially significant rights” occurs even when the licensor retains certain “limited manufacturing rights” (e.g., rights to manufacture patent-covered products solely for the licensee) or “co-rights” (e.g., shared rights to co-develop, co-promote, co-market, and co-commercialize).

The FTC limits the revised rules to patents covering products whose manufacture and sale generate revenues in NAICS Industry Group 3254. This industry group includes medical and botanical manufacturing, pharmaceutical preparation manufacturing, in-vitro diagnostic substance manufacturing, and biological product (except diagnostic) manufacturing.

According to the FTC, it limited the revisions to the pharmaceutical industry because, among other reasons, the 66 premerger notifications involving exclusive patent licenses that the FTC received for the five-year period ending December 31, 2012, all related to pharmaceutical patents. Despite its reasoning, the revised rules may be seen as a part of the FTC’s increasing focus on the pharmaceutical industry.