FTC Proposes New HSR Rules for Exclusive Patent Licenses in the Pharmaceutical Industry

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On August 13, 2012, the U.S. Federal Trade Commission (FTC) announced it is seeking public comment to proposed changes to the premerger notification rules under the Hart Scott Rodino Act (HSR) relating to acquisitions of exclusive patent rights in the pharmaceutical industry.

Background

HSR requires parties to certain mergers and acquisitions to file reports with the FTC and the Antitrust Division of the U.S. Department of Justice and wait a certain period of time before closing such transactions. The reporting and waiting period requirements are intended to permit these agencies to decide whether a proposed transaction may violate antitrust laws and, when appropriate, seek a preliminary injunction to prevent consummation.

FTC staff has historically taken the position that a transaction involving the transfer of exclusive rights to a patent, typically in the form of an exclusive license, is potentially reportable under HSR. In the pharmaceutical industry, where a licensor frequently retains rights to co-develop, co-market or similar "co- rights," FTC staff has typically determined that retention of these co-rights alone are insufficient to render the transaction a non-exclusive license not subject to HSR. FTC staff has historically decided that when the licensor retains manufacturing rights, the transaction is merely a distribution agreement and therefore not reportable. However, under the proposed rules, retention of manufacturing rights would not convert an otherwise reportable transfer into a non-reportable one.

Proposed Rules

 

Transfer of All Commercially Significant Rights

The proposed rules add as a new term, "all commercially significant rights," under which any transfer of all commercially significant rights under a patent in the pharmaceutical industry would be a potentially reportable transaction. The new term is 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)."

Retention of Manufacturing Rights

In its notice of proposed rulemaking, the FTC takes the position that "in licensing arrangements in the pharmaceutical industry, the right to manufacture is far less important than the right to commercialize." Where the licensor is retaining the rights to manufacture solely for the use of the licensee in the particular therapeutic areas or indications that are the subject of the license, the FTC defines the retained rights as "limited manufacturing rights" and takes the position that this is basically the same as giving the licensee the exclusive right to manufacture the product covered by the license. As the FTC indicates in the notice of proposed rulemaking, "[t]his 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."

Retention of Co-Rights

The new rules will not change the FTC's current position that the retention of co-development, co-promotion and similar rights does not render a transaction non-exclusive. According to the FTC, in its experience:

"[W]hen the licensor retains co-rights, typically only the licensee can use the patent rights as it strives to gain FDA approval for the pharmaceutical product, and any eventual royalty stream or other revenue sharing mechanism flows from this exclusivity. So, even though both the licensee and licensor will share any eventual profits, the profits result from a potentially reportable transfer to the licensee of the exclusive right to use the patent."

 

Limitation to the Pharmaceutical Industry

Because "the pharmaceutical industry presents unique incentives for the use of exclusive licenses," the proposed rules are limited to transfers of rights in the pharmaceutical industry, NAICS Industry Group 3254, including:

  • 325411 Medical and Botanical Manufacturing
  • 325412 Pharmaceutical Preparation Manufacturing
  • 325413 In-Vitro Diagnostic Substance Manufacturing
  • 325414 Biologic Product (except Diagnostic) Manufacturing

For Further Information

If you have any questions about this Alert, please contact David A. Charapp, the author of this Alert; John M. Neclerio; any other member of the Technology Transactions and Licensing Practice Group; or any attorney in the firm with whom you are in regular contact.