FTC Seeks Comments on Proposed HSR Rule Amendments Related to the Transfer of Exclusive Patent Rights in the Pharmaceutical Industry

by Perkins Coie

The Federal Trade Commission (“FTC”) recently announced and asked for comments on proposed changes to the premerger notification rules under the Hart-Scott-Rodino Act (“HSR Act”).  The proposed rules would require pharmaceutical companies to report to the FTC and the Department of Justice ("DOJ") acquisitions of exclusive patent licenses in which the licensor retains the right to manufacture patented products for the licensee.  The acquisition of such licenses is not reportable under the current rules.  The FTC estimates the proposed rule amendments will result in an additional 30 reportable transactions per year.

The proposed rule amendments provide a framework for determining when a transfer of rights to a patent in the pharmaceutical and medicine manufacturing industry results in a potentially reportable transaction.  The proposed amendments are important because they introduce the concept of “all commercially significant rights” as the basis for analyzing the transfer of rights to a patent in the pharmaceutical industry under the HSR Act.

Comments can be submitted electronically at https://ftcpublic.commentworks.com/ftc/hsripnprm/ or on paper by following the instructions at http://ftc.gov/opa/2012/08/hsr.shtm.  The comment period for the proposed new rules ends October 25, 2012.


The HSR Act requires parties to proposed acquisitions of voting securities, non-corporate interests or assets to notify the FTC and the DOJ (the “enforcement agencies”) before consummating the proposed acquisition.  The parties must wait a specific period of time while the enforcement agencies review the proposed transaction, usually 30 days (15 days in the case of a cash tender offer or a bankruptcy sale), before they may complete the transaction.

Applying the existing HSR rules to acquisitions of intangible assets such as patents has not proved controversial.  But acquisitions of patent licenses, rather than patents themselves, have presented difficulties.

FTC staff has long taken the position that the grant of an exclusive intellectual property license is the transfer of an asset to the licensee, which may be reportable under the HSR Act (assuming the applicable size-of-person and size-of-transaction thresholds are met). 

FTC staff analysis of whether "exclusive" rights to a patent are to be transferred has focused on the rights to “make, use and sell” under the patent – in other words, whether the license covers the bundle of rights to exclusively make, develop for all potential uses, and sell products covered by a patent.  The transfer of all such rights is a potentially reportable asset acquisition under the HSR Act.  But where the licensor retains the right to manufacture (even if it has no intention of doing so), the license is considered non-exclusive and, in most instances, not a reportable acquisition under the HSR Act.  Even if not reportable under the HSR Act, though, the transaction may still be subject to substantive antitrust review under Section 7 of the Clayton Act or Section 2 of the Sherman Act.

Exclusive Licensing Agreements Unique to the Pharmaceutical Industry

FTC staff has concluded that the exclusive licensing arrangements in the pharmaceutical industry are unlike those in any other industry.  In pharma, the right to manufacture may be less important than the right to commercialize a product.  In pharma licensing deals, the right to manufacture is often retained by the licensor, who has the relevant manufacturing expertise and facilities.  The licensee receives the exclusive right to use and sell (that is, commercialize) the product covered by the patent.  If the licensor's retained right to manufacture is limited to manufacturing the product solely for the use of the licensee, the license effectively transfers exclusive rights to manufacture, use and sell that product to the licensee.  The proposed rule amendments would treat this kind of exclusive pharmaceutical license as a potentially reportable asset acquisition under the HSR Act.

New Concepts Under the Proposed Rules – “All Commercially Significant Rights,” “Limited Manufacturing Rights” and “Co-Rights”

Under the proposed rules, the determination of whether a transfer of exclusive rights to a pharmaceutical patent is a reportable asset acquisition focuses on the rights being acquired rather than the form of the transfer.  While the usual mechanism of such a transfer is a license, the proposed rules set forth the key concept of "all commercially significant rights" as the definition of the exclusive rights to be acquired that constitute a reportable acquisition of assets.  In addition, the newly defined terms "limited manufacturing rights" and "co-rights" define the rights that may be retained by the licensor but are not sufficient to render the license non‑exclusive.

The proposed rules define these new concepts as set forth below.

All commercially significant rights.  The term "all commercially significant rights" means "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)."

Limited manufacturing rights.  The term "limited manufacturing rights" means "the rights retained by a patent holder to manufacture the product(s) covered by a patent when all other exclusive rights to the patent within a therapeutic area (or specific indication within a therapeutic area) have been transferred to the recipient of the patent rights.  The retained right to manufacture is limited in that it is retained by the patent holder solely to provide the recipient of the patent rights with product(s) covered by the patent (which either the patent holder alone or both the patent holder and the recipient may manufacture)."

Co-rights.  The term "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.  These co-rights include, but are not limited to, co-development, co-promotion, co‑marketing and co-commercialization."

The proposed rules limit the application of the above concepts to transfers involving patents covering products whose manufacture and sale would generate revenues in North American Industry Classification System (NAICS) industry group 3254, Pharmaceutical and Medicine Manufacturing Industries, which includes Medicinal and Botanical Manufacturing, Pharmaceutical Preparation Manufacturing, In-Vitro Diagnostic Substance Manufacturing and Biological Product (except Diagnostic) Manufacturing.

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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