November 13, 2013

FTC Announces Amendments to Hart-Scott-Rodino Rules Regarding Pharmaceutical Patent Licenses

Holland & Knight Alert
John R. Dierking

The Federal Trade Commission (FTC) has announced revisions to the rules under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) that will apply to certain transactions involving the transfer of patent rights in the pharmaceutical and medicine manufacturing industry. The amendments will be effective thirty days after publication in the Federal Register, which should occur soon.

HSR requires parties intending to merge, purchase or sell voting securities, non-corporate interests or assets, or engage in certain other acquisition transactions to provide both the FTC and the Antitrust Division of the Department of Justice (DOJ) with information regarding their operations and the proposed transaction if both the size of transaction and size of person jurisdictional thresholds set forth in the applicable rules are met and no exemption is available. If required, an HSR filing stays the consummation of a covered transaction for the waiting period specified by law based on the law's purpose to allow the FTC and DOJ time to detect and potentially address any perceived anti-competitive effects of a transaction.

Historical HSR Treatment of Licenses

While the term "asset" is not defined in either HSR or its rules, the Premerger Notification Office (PNO) of the FTC has generally interpreted the term in its broadest sense to include all property, both real and personal, tangible and intangible, subject to certain exclusions. In addition, the PNO has stated that the grant of an "exclusive license" to intellectual property where the grantor does not retain any right to use the intellectual property is treated as a transfer of an asset under HSR and is thus a potentially reportable transaction. On the other hand, the PNO has historically stated that the grant of a "non-exclusive license," where the grantor retains the use of the intellectual property and/or the right to grant additional licenses, does not constitute the transfer of an asset under HSR. Thus, the key to determining whether the grant of a license is reportable under HSR has been whether the license is deemed "exclusive" or "non-exclusive" for purposes of HSR — regardless of what the underlying documents may term the license.

Use of Licenses in the Pharmaceutical Industry

With respect to the pharmaceutical industry, the PNO has informally stated in the past that the analysis to determine whether a grant of the exclusive rights to commercially use a patent or part of a patent in the pharmaceutical industry would be deemed an exclusive license was whether the right to "make, use, and sell" the product without restriction was being transferred. In announcing the new rules, however, the FTC asserts that it has become common in recent years for pharmaceutical companies to transfer most but not all of the rights to "make, use, and sell" under an exclusive license. For example, the licensor may retain the right to manufacture under the patent, but only for the licensee. Prior to promulgation of the new rules, the licensor's retention of the right to manufacture would render the license non-exclusive for purposes of HSR and thus the transfer would not be subject to HSR filing requirements. The PNO also cites the increasing frequency of licensors in the pharmaceutical industry retaining the rights to co-develop, co-promote, co-market and co-commercialize the products together with the licensees although the PNO has consistently taken the position that retention by the licensor of co-rights alone does not render a license non-exclusive for purposes of HSR reportability.

New HSR Requirements for Exclusive Licenses of Pharmaceutical Patents

The new rules introduce the concept of an "all commercially significant rights" test to determine whether a license to a pharmaceutical patent is deemed a transfer of the exclusive right to commercially use a patent or a part of a patent and thus an asset transfer reportable under HSR. This test is deemed met if the transfer allows only the recipient of the license to commercially use a pharmaceutical patent, in whole or in part, in a particular "therapeutic area" or specific "indication" within a therapeutic area. A "therapeutic area" for these purposes covers the intended use of the patent, such as for cardiovascular use, and includes all indications. An "indication," on the other hand, focuses on a narrower segment of a therapeutic area, such as Alzheimer's disease within the neurological therapeutic area.

The rules will also now specifically provide that a transfer of assets for purposes of HSR will occur even if the licensor: (1) retains the right to manufacture under a pharmaceutical patent or part of a patent for the licensee, and/or (2) retains co-rights; in each case, such rights will not render the license non-exclusive. On the other hand, exclusive licenses which do not involve the transfer of exclusive rights to use a pharmaceutical patent or part of the patent, such as an exclusive distribution agreement, will not be affected by the new rules.

The PNO states that the new HSR rules regarding treatment of licenses where the licensor retains the right to manufacture exclusively for the licensee is limited to the pharmaceutical industry — not because of the uniqueness of the incentives in the industry, but rather based on the finding that exclusive patent license agreements which transfer all of the rights to commercially use a patent or part of a patent "almost solely occur in the pharmaceutical industry" and that no other industries appear to rely on these types of arrangements. The exclusive license arrangements typically occur where an innovator has discovered and patented a pharmaceutical or biomedical compound but is unable financially to complete the FDA approval process and/or market or promote the product once FDA approval is received. To retain a right to royalties from any future sales of the product, the licensor will enter into an exclusive license agreement with another and usually larger pharmaceutical company rather than a sale of the patent to such a company.

The products of the patents which are the subject of these new rules consist of those whose manufacture and sale would generate revenues in the pharmaceutical and medicine manufacturing industry set forth in the North American Industry Classification System (NAICS) Industry Group 3254. This NAICS group includes medicinal and botanical manufacturing, pharmaceutical preparation manufacturing, in-vitro diagnostic substance manufacturing and biological product manufacturing.

Penalties for Noncompliance

Noncompliance with any requirements under HSR may subject a person, or any officer, director or partner of such person, to civil penalties of up to $16,000 per day for each day of violation. In addition to any monetary penalties, courts may also order compliance with HSR requirements and an extension of the HSR waiting period until substantial compliance has occurred. Courts may also grant certain other equitable relief for any failure by a person to substantially comply with either the HSR premerger notification requirements or with a request by the regulators for additional information once an HSR filing has been made.


To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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