FTC May Expand Premerger Reporting Requirements to Include Pharmaceutical Patent Exclusive Marketing and Sales Licenses


Earlier this week, the FTC (in cooperation with the DOJ) announced that it is considering making changes to the premerger notification rules that would require pharmaceutical companies to make Hart-Scott-Rodino (HSR) filings for patent deals that grant exclusive marketing and sales rights to another company.

Apparently, the FTC has become concerned that where a licensor manufactures solely for the use of a licensee, and the licensee has exclusive marketing and sales rights, the transaction may be economically indistinguishable from one actually giving the licensee the exclusive right to manufacture. It thus proposes to focus the new rule on “all commercially significant rights”:

[I]n licensing arrangements in the pharmaceutical industry, the right to manufacture is far less important than the right to commercialize. In fact, the right to manufacture is often retained by the licensor who has the relevant manufacturing expertise and facilities. As a result, 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. As the licensor is manufacturing solely for the use of the licensee, this is substantively the same as giving the licensee the exclusive right to manufacture, use and sell the product(s) covered by the license.

The proposed rule would treat this kind of exclusive license agreement as a potentially reportable asset acquisition. This aspect of the rule is a significant change in the weight given to manufacturing rights in determining whether or not exclusive rights to a patent are being transferred. Under the proposed rules, if the licensor retains the right to manufacture exclusively for the licensee, it is a potentially reportable asset acquisition because all commercially significant rights, as discussed below, will still have passed to the licensee.

The FTC has in recent years taken a special interest in the pharmaceutical industry, and has been relatively hostile to so-called reverse patent settlements, where a pharmaceutical patentee settles patent litigation against a would-be generic manufacturer, and the generic manufacturer agrees to stay off the market for some time period in return for a cash payment. The FTC’s proposed HSR amendment, which is limited to the pharmaceutical industry, continues its efforts to pay special attention to pharmaceuticals.

It is not clear how many additional transactions will be reported if the amended rule goes into effect (the FTC itself estimates about 30 more per year). Comments to the proposed rule are due on or by October 25, 2012.

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