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FTC Expands Premerger Notification Requirements to Cover Certain Pharmaceutical Patent Licenses

Jones Day - Cleveland Office

November 15, 2013

Previously published on November 2013

On November 6, 2013, the Federal Trade Commission ("FTC") amended the HSR Act rules to include additional pharmaceutical patent licenses under the premerger notification and waiting period requirements (the "amended rules"). The amended rules specify that an exclusive patent license relating to a pharmaceutical product that transfers "all commercially significant rights" to the patent or part of the patent is an asset for purposes of the HSR Act. The amended rules also codify the FTC's longstanding policy that an exclusive license may be an asset for HSR Act purposes, notwithstanding the licensor’s retention of certain co-rights.

FTC's current policy on exclusive patent licenses

The FTC’s Premerger Notification Office ("PNO") has long considered that a licensee’s receipt of exclusive rights under a patent license may constitute the acquisition of an asset under the HSR Act, and so may trigger the notification and waiting requirements of the HSR Act, if the transaction satisfies the applicable thresholds.  (Based on the current thresholds, which are adjusted annually, a licensee’s acquisition of exclusive rights under a patent license could be subject to the reporting requirements of the HSR Act if the value of the transaction exceeds $70.9 million. In the pharmaceuticals industry, consideration for patent licenses often involves milestone and other contingent payments; therefore determining the value of the transaction under the HSR Act rules can be complex.)

Prior to the amendment, the PNO interpreted the HSR rules to apply only to patent licenses that were exclusive (even vis-a-vis the patent owner) to "make, use, and sell" a patented product within a defined territory or field of use. For example, if the licensor retained limited manufacturing rights, the license was treated as nonexclusive and was not treated as an asset acquisition subject to the HSR Act. On the other hand, a licensor’s retention of certain "co-rights," such as an agreement to co-develop, co-promote or co-market, was insufficient to render the license non-exclusive for HSR Act purposes.

Exclusive pharmaceutical patent licenses under the amended rules

The amended rules clarify that a pharmaceutical patent license is an asset acquisition subject to the HSR Act’s reporting requirements if the license transfers "all commercially significant rights" to a patent or part of a patent relating to the pharmaceutical, including biologic, and medicine, manufacturing industry. This includes patents relating to botanical manufacturing, pharmaceutical preparation manufacturing, in-vitro diagnostic substance manufacturing, and biological product (but not diagnostic) manufacturing, among other areas.

Definitions:  The amended rules define "all commercially significant rights" as "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)." A license may transfer all commercially significant rights, notwithstanding that the licensor retains "limited manufacturing rights" and/or "co-rights."  Limited manufacturing rights are rights retained by a patent holder to manufacture "solely to provide the recipient of the patent rights with product(s) covered by the patent." Co-rights are "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" and include "co-development, co-promotion, co-marketing, and co-commercialization." Co-rights do not include the right of a licensor to commercially use the patent or part of the patent.

Exclusive licenses outside the pharmaceuticals sector

While the amended rules apply only to patents in the pharmaceutical industry, exclusive patent licenses in any industry may be reportable under the PNO’s current policy as it has evolved through the PNO's published informal interpretations of the HSR Act rules, including in the technology sector where licensing arrangements similar to the ones targeted by the new rules are customary. Parties to exclusive licensing agreements similar to those covered by the amended rules in other industries should consult with the Premerger Notification Office staff to determine whether the parties must report the transaction under the HSR Act.

The FTC estimates that the amended rules will result in about 30 additional HSR filings each year.  Nevertheless, parties to exclusive patent license agreements should consider their obligations under the HSR Act carefully, as failure to observe the notification and waiting period requirements may result in civil penalties amounting to as much as $16,000 per day.

The amendments to 16 C.F.R. §§ 801.1 and 801.2 will become effective 30 days after the final rule is published in the Federal Register.  Publication is expected to occur later this week.


The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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