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The Federal Trade Commission (FTC) recently announced proposed
amendments to the Premerger Notification Rules (HSR Rules) to
clarify reporting requirements under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR Act), for
transactions involving the transfer of patent rights in the
pharmaceutical industry. The proposed rule is largely a
codification of the FTC's current treatment of exclusive
licenses, with one significant change regarding the weight given to
manufacturing rights retained by the licensor in pharmaceutical
transactions.
The HSR Act requires parties engaged in certain transactions
(involving the acquisition of voting securities, assets, or
controlling non-corporate interests) to file a notification with
the FTC and the Antitrust Division of the Department of Justice
(DOJ), and to observe the statutorily prescribed waiting period
prior to closing. The acquisition of a patent is treated as an
asset acquisition, and thus a potentially reportable transaction
under the HSR Act. However, whether the transfer of rights to a
patent is also deemed an asset acquisition commonly involves a
complex analysis focused on whether the transferred rights grant
the licensee the exclusive right to "make, use and
sell."
Commercially Significant Rights
The proposed amendments would codify the reporting requirement
under the HSR Act for any transaction within the pharmaceutical
industry that involves the transfer of "all commercially
significant rights." These rights are defined as the exclusive
patent rights to use the patent in a particular therapeutic area or
in a specific indication within a therapeutic area.
The FTC has defined the pharmaceutical industry for purposes of
this amendment by specifying NAICS (North American Industry
Classification System) code 3254, which includes medical and
botanical manufacturing, pharmaceutical preparation manufacturing,
in-vitro diagnostic substance manufacturing, and biological product
manufacturing. Importantly, the FTC's proposed amendments are
limited to the pharmaceutical industry and do not change the
current HSR Act reporting requirements related to exclusive
licenses in other industries.
Retained Manufacturing Rights
Under current FTC practice, transactions where the licensor
retains the right to manufacture are generally deemed non-exclusive
and thus non-reportable under the HSR Act, even if the licensee
obtains exclusive rights to use and sell under the patent. These
transactions historically have been viewed as distribution
agreements, rather than asset acquisitions.
The FTC, however, has determined that the right to manufacture
in pharmaceutical licensing arrangements is far less important than
the right to commercialize (use and sell) the product. Therefore,
the FTC's proposed amendment treats these types of exclusive
arrangements in the pharmaceutical industry — where the
licensee obtains the exclusive right to use and sell but the
licensor retains the right to manufacture — as the
transfer of "all commercially significant rights" and
thus potentially reportable under the HSR Act. This change would
represent a significant departure from the FTC's current
practice.
Retained "Co-Rights"
In certain licensing arrangements, the licensor often retains
"co-rights" when granting an otherwise exclusive license.
For example, in the pharmaceutical industry, co-rights provide for
the shared responsibility between the licensor and the licensee to
see the licensed product through the Food and Drug Administration
(FDA) approval process, and the subsequent marketing and promotion
of the product (often referred to as "co-development" and
"co-marketing" rights). Under current FTC practice, the
retention of these co-rights by the licensor does not render the
license non-exclusive, therefore they remain potentially reportable
licensing arrangements under the HSR Act. The proposed amendments
would simply codify this approach without making any change to
current practice.
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