FTC Proposes Amendments to the Premerger Notification Rules to Expand the Reportability of Transfers of Exclusive Patent Rights in the Pharmaceutical Industry

by Sheppard Mullin Richter & Hampton LLP

[authors: Bob Magielnicki and Malika Levarlet]

On August 13, 2012, the Federal Trade Commission (“FTC”) proposed amendments to the Premerger Notification Rules issued under the Hart Scott Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). The proposed amendments would expand when a transfer of exclusive rights to a patent in the pharmaceutical industry is potentially reportable under the HSR Act.

The HSR Act requires the parties to an acquisition of assets, voting securities or non-corporate interests meeting certain thresholds to file notifications with the FTC and the Antitrust Division of the Department of Justice and observe a waiting period before they can consummate the transaction. As a patent clearly is an asset, there is no question that the acquisition of a patent is potentially subject to the requirements of the HSR Act. However, it is not so clear as to when an exclusive patent license qualifies as an asset acquisition.

Under the present HSR Rules, the Premerger Notification Office (“PNO”) of the FTC (which provides informal interpretations of the Rules) has taken the position that, in order to qualify as an asset acquisition, the license must grant the licensee exclusive rights to “make, use and sell” under the patent, even against the licensor. Thus, if the licensor retains the right to manufacture under the patent, the transaction is not reportable.

In explaining the rationale for the proposed amendments, the FTC noted that in many exclusive licenses in the pharmaceutical industry, the licensor retains rights in one or both of two categories: manufacturing rights and co-rights. According to the FTC, if the retention of manufacturing rights is solely to manufacture for the licensee, that is substantively the same as giving the licensee the exclusive right to manufacture. As to co-rights, which permit the licensor to assist in the Food and Drug Administration approval process, and in the promotion and marketing of the product, they do not detract from the exclusivity of the license.

Proposed new Section 801.2(g) of the HSR Rules provides that transfers of patent rights in the pharmaceutical industry (NAICS Industry Group 3254) constitute an asset acquisition if and only if “all commercially significant rights” to a patent for any therapeutic area or specific indication are transferred to another entity. However, all commercially significant rights are transferred even if the patent holder retains “limited manufacturing rights” or “co-rights”.

The proposed amendments also add three new definitions to the HSR Rules. The first, “all commercially significant rights” means the exclusive rights to a patent that allow only the recipient to use the patent in a particular therapeutic area or specific indication within a therapeutic area. “Limited manufacturing rights” means the retention of manufacturing rights “solely to provide the recipient of the patent rights with product(s) covered by the patents.” The third, “co-rights”, means “shared rights retained by the patent holder to assist the recipient of the exclusive patent rights in developing and commercializing the product covered by the patent.”

According to the FTC: “The proposed rule thus clarifies the analysis of the reportability of transfers of pharmaceutical patent rights while providing the Agencies with a better opportunity to review the transfers of exclusive rights to a patent in the pharmaceutical industry for competitive concerns.” It estimates that the amendments will result in an increase of 30 HSR filings per year.

The proposed amendments are open to public comments until October 25, 2012.


Written by:

Sheppard Mullin Richter & Hampton LLP

Sheppard Mullin Richter & Hampton LLP on:

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