Antitrust agencies amend premerger notification rules to clarify reporting of certain acquisitions of exclusive patent rights in the pharmaceutical industry

by DLA Piper

The US Federal Trade Commission, with the concurrence of the Antitrust Division of the US Department of Justice, has amended the premerger notification rules to clarify when a transfer of exclusive rights to a patent or part of a patent in the pharmaceutical industry is reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.i

The new rules require that transfers of “all commercially significant rights” (typically in the form of an exclusive license) to a patent or part of a patent in the pharmaceutical industry, including biologics, be reported to the antitrust agencies at least 30 days in advance of closing of the proposed transfer, assuming the HSR Act’s other statutory thresholds are met.

The new rules may cause an uptick in premerger notification filings in the pharmaceutical industry by expanding the reportability of certain license transactions in which the licensor retains limited rights to “make” the drug at issue for the licensee or assists the licensee in the sale of the drug.  The new rules clarify that premerger notification reporting is required even where the licensor retains limited rights to manufacture for the licensee and co-rights to co-develop, co-promote, co-market or co-commercialize with the licensee.

The rule amendments will be effective 30 days after their publication in the Federal Register and are expected to be effective by year end.  Notably, the new rules apply only to the pharmaceutical industry – a departure from the other premerger notification rules, which are of general application.


For years the Premerger Notification Office of the Federal Trade Commission took the position that a transfer of patent rights was exclusive, and thus potentially reportable under the HSR Act, if the rights to “make, use, and sell” the patented product were transferred.  The FTC reports that, in recent years, pharmaceutical companies began transferring most, but not all, rights to “make, use, and sell,” with the licensor often retaining the right to manufacture exclusively for the licensee, or entering into co-develop, co-promote, co-market and co-commercialize agreements with the licensee. This has led to some confusion about whether such transactions were subject to premerger notification.

In response to these changes in pharmaceutical industry practice, the FTC determined that “the ‘make use sell’ approach is no longer adequate in evaluating the reportability of exclusive licenses in the pharmaceutical industry for HSR purposes.”

“All commercially significant rights” test used to determine reportability          

The new rules utilize an “all commercially significant rights” test to determine whether a license has transferred an exclusive right and is thus subject to the HSR Act.  Specifically, §801.2(g)(3) of the new rules provides that transfer of exclusive rights to a patent or part of a patent in the pharmaceutical industry will be a reportable “asset acquisition” under the HSR Act (assuming the relevant statutory size-of-transaction and size-of-parties thresholds are met and the transaction is not otherwise exempt under the rules) if the transfer allows only the recipient to commercially use the patent as a whole, or part of a patent within a therapeutic area or for a specific indication within a therapeutic area.  In such a case, only the recipient of the exclusive rights may generate revenue from the patent or part of the patent, even though some of those revenues may be shared with the licensor through contract manufacturing fees, royalties or profit-sharing arrangements.

Reporting required even if licensor retains limited manufacturing and co-rights          

The new rules clarify that a transfer of “all commercially significant rights” occurs even when the licensor retains limited rights to manufacture solely for the licensee, or co-rights to commercially use the patent or part of the patent with the licensee.  This is because, in the FTC’s experience and view, a license subject to the retention of such limited manufacturing rights “has the same effect as a transfer to the licensee of all patent rights,” and “the existence of a co-right is indicative of an effort on the part of the licensor to support the sales and marketing of the licensee in order to create a more lucrative royalty stream.”

In either case, according to the FTC, the licensor  gives up the right to its own commercial use and sale of the product in competition with the licensee.  Accordingly, under the new rules, retention by the licensor of limited rights to manufacture the patented product exclusively for the licensee, and retention of co-rights to co-develop, co-promote, co-market or co-commercialize in conjunction with the licensee, will not obviate the need to report the patent transfer under the HSR Act.

Application expressly limited to the pharmaceutical industry          

The new rules caused some controversy (including a comment objecting to the proposed rules from the Pharmaceutical Research and Manufacturers of America trade association) because they are expressly limited to the pharmaceutical industry.  The FTC explained that such limited rulemaking was warranted because, “in the PNO’s experience, the pharmaceutical industry is the only industry in which parties regularly enter into exclusive patent licenses that transfer all commercially significant rights” in lieu of an outright patent sale or non-exclusive license, as seen in other industries.  The FTC explained that the transfer of exclusive patent rights is uniquely prevalent in the pharmaceutical industry because of the uncertainty surrounding the potential success of any new drug (particularly before Food and Drug Administration approval is obtained) and the resultant difficulty in valuing any patent that is obtained prior to commercialization.          

The new rules are in keeping with the antitrust agencies’ continued focus on antitrust enforcement in the pharmaceutical industry, which, in recent years, has included scrutiny and high-profile challenges of so-called “reverse payment settlements” as well as agency investigation of numerous industry mergers and other transactions reported under the HSR Act.  Recently, the FTC reported seeking relief in 119 out of 122 horizontal pharmaceutical mergers investigated in fiscal years 1996 to 2011.ii  The new premerger notification rules thus may lead not only to increased reporting of exclusive patent licensing activity in the pharmaceutical industry, but increased regulatory review and scrutiny of those arrangements as well.


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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