New FTC Rule Means More Exclusive Patent Rights Transfers Must Be Reported

by Goodwin
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Under a new rule that becomes effective on December 16, 2013, the Federal Trade Commission (“FTC”) has expanded the reach of the Hart-Scott-Rodino (“HSR”) Act to capture the transfer of a patent license even where the licensor retains manufacturing and other co-rights.  The new rule is initially limited to the transfer of licenses in the pharmaceutical industry.  The FTC, however, has stated that it will continue to consider the applicability of the new rule to other industries and advises that parties who are transferring rights to a patent or part of a patent should consult with the FTC to determine whether they may need to file notification under the HSR Act.

The HSR Act

The HSR Act requires transactions that meet certain thresholds in terms of value and the size of the parties be reported to the FTC and Department of Justice Antitrust Division before the parties can close.[1]  The HSR Act covers acquisitions of assets, in addition to acquisitions of voting securities and noncorporate interests such as partnership shares or limited liability company membership interests.

The Old Rule Covering Patent Rights

The FTC has for decades viewed an exclusive patent license to be the transfer of an asset that may require notification under the HSR Act.  The FTC has also historically taken the view that an exclusive license to use only part of a patent (such as a limited exclusive license to use the patent for certain therapeutic indications) or to use the patent in limited geographic territories was an asset acquisition that could require notification.  To determine whether a patent license was exclusive, the FTC adopted a test that asked whether the licensee would acquire the right to “make, use and sell” products under the patent or part of the patent to the exclusion of all others, including the licensor.  Under this analysis, the retention by the licensor of the right to manufacture product under the patent, even if it was for the exclusive use of the licensee (as is often the case in the pharmaceutical industry), rendered the patent non-exclusive and therefore not reportable under the HSR Act.

The new FTC rule does away with the “make, use and sell” test.  Now, the retention by the patent holder of limited manufacturing rights (even if it is solely for the use of the licensee) or other co-rights under a patent will not be sufficient to obviate the need for an HSR Act filing.

The New Rule Covering Patent Rights

Under the new rule that will be effective on December 16, 2013, the FTC will look to whether “all commercially significant rights” to a patent or part of a patent are being transferred.  The rule is not confined to patent licenses.  Instead, the transfer of rights under a patent – whether pursuant to an exclusive license or another form of transfer – may be reportable under the HSR Act even if the patent holder retains limited manufacturing rights or other co-rights, such as rights to co-develop, co-promote, co-market and co-commercialize.

The key to reportability will be whether the recipient obtains the exclusive right to use the patent as a whole, or a part of the patent in a particular therapeutic area or specific indication within a therapeutic area, to generate revenue (even if part of this revenue must be shared under the terms of the agreement with the patent holder).  The transfer of a subset of rights under a patent may be reportable if only the recipient can generate revenue from those exclusive rights.

The New Rule is Limited to the Pharmaceutical Industry

The FTC has limited the applicability of the new rule governing the transfer of exclusive patent rights to the pharmaceutical industry.  As the FTC explained when it implemented the new rule, it believes “the pharmaceutical industry is the only industry in which parties regularly enter into exclusive patent licenses that transfer all commercially significant rights.”  Somewhat opaquely, the FTC also explained in its announcement of the new rule that “transfers of exclusive rights to patents in other industries remain potentially reportable under the Act and existing HSR rules.”  In its announcement, the FTC twice recommended that parties who are contemplating exclusive license transfers outside the pharmaceutical industry consult with the FTC Premerger Notification Office for advice concerning their potential reporting obligations under the HSR Act.

Until it becomes clear how the FTC intends to apply the new rule, it will be good practice for any party who is negotiating a transfer of exclusive patent rights – whether in the pharmaceutical industry or other areas – to consult with HSR Act counsel regarding their transaction.  Parties to a transaction that must be notified under the HSR Act are required to observe certain waiting periods between filing and closing.  Parties who fail to make a required notification filing can be fined up to $16,000 per day.


[1] Currently, the basic thresholds that can trigger a filing under the HSR Act are (i) the value of the transaction must exceed $70.9 million, and (ii) one party to the transaction must have annual net sales or total assets of $141.8 million or more, and another party to the transaction must have annual net sales or total assets of $14.2 million or more.  At the beginning of each year, FTC adjusts these thresholds based on the change in gross national product from the prior year.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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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