FTC Final Changes to the Premerger and Patent Transfer Notification Rules for Life Science Manufacturers
The Federal Trade Commission has revised the rules dictating when pharmaceutical companies must report a transfer of exclusive patent rights to the U.S. Department of Justice and the FTC for antitrust review and approval, the agency announced November 6, 2013. The revisions to the commission’s acquisition notification requirements, which will broaden the types of pharmaceutical patent-licensing arrangements that need authorities’ blessing, clarify that even a partial transfer of patent rights can give a licensee the exclusive ability to commercially exploit a drug patent.
In response, the Pharmaceutical Research and Manufacturers of America (PhRMA) accused the Federal Trade Commission of exceeding its authority under federal merger law and discriminating against the industry by proposing to expand the types of exclusive pharmaceutical patent rights licenses that require antitrust approval. The trade group urged the FTC to abandon its plans to amend its premerger notification rules governing what types of exclusive patent rights transfers require antitrust approval, saying it unfairly singled out the pharmaceutical industry.
The rule applies to reportable acquisitions of voting securities, controlling non-corporate interests, and assets. A patent is an asset under the Act. The acquisition of a patent gives the buyer the right to commercially use that patent to the exclusion of all others. The same is true of an exclusive license to a patent. In an exclusive patent licensing arrangement, the licensor gives the licensee the right to commercially use the patent, or a part of the patent, to the exclusion of all others, including the licensor.
An exclusive license is substantively the same as buying the patent or part of the patent outright, and carries the same potential anticompetitive effects. Thus, the granting of an exclusive right to commercially use a patent or part of a patent is a potentially reportable asset acquisition under the Act.
I. Past Years
In determining reportability, the parties must analyze what the licensor is transferring to the licensee and determine whether the license conveys the exclusive rights to commercially use the patent or part of a patent. For years, this analysis was straightforward as evidenced by the questions and filings received by the PNO about exclusive patent licenses in the pharmaceutical industry that expressly included the rights to “make, use, and sell” under the patent or part of the patent.
For such licenses, the PNO had only to verify that the transfer involved the exclusive right to use a patent or part of a patent to develop a product, manufacture the product, and sell that product without restriction. Although never codified, the “make, use and sell” approach became well-known throughout the HSR bar and is reflected in the numerous letters and emails from practitioners in the PNO’s informal interpretation database on its website.
II. Recent Years
In recent years, however, it has become more common for pharmaceutical companies to transfer most but not all of the rights to “make, use, and sell” under an exclusive license, such that the “make, use and sell” approach is no longer adequate in evaluating the reportability of exclusive licenses in the pharmaceutical industry for HSR purposes. A licensor will often, for example, retain the right to manufacture under the patent, but under the agreement the licensor can only manufacture for the licensee. In such a case, under the PNO’s “make, use, and sell” approach, the retention of the right to manufacture would render the transaction non-reportable even though the licensor would not be manufacturing for its own commercial use, but exclusively for the licensee.
In addition, the PNO has seen with increasing frequency licensors retaining the right to co-develop, co-promote, co-market and co-commercialize the product along with the licensee, and the retention of these “co-rights” also raises questions about the adequacy of using the “make, use, and sell” approach to determine reportability. Practitioners who represent clients in the pharmaceutical industry have often sought guidance from the PNO about transactions where the licensor grants the licensee the exclusive right to commercially use a pharmaceutical patent or part of a patent but retains the right to manufacture for the licensee and/or to co-develop, co-promote, co-market and co-commercialize the product along with the licensee. This rule addresses when an exclusive patent license to a pharmaceutical patent or part of a patent constitutes an asset transfer under the HSR Act.
III. “All Commercially Significant Rights”
The “all commercially significant rights” test in the rule captures more completely what the “make, use, and sell” approach was a proxy for, namely whether the license has transferred the exclusive right to commercially use a patent or a part of a patent. § 801.2(g)(3) of the rule provides that the transfer of exclusive rights to a patent or a part of a patent in the pharmaceutical industry is a reportable asset transfer if it allows only the recipient to commercially use the patent as a whole, or a part of the patent in a particular therapeutic area or specific indication within a therapeutic area. The rule codifies the PNO’s long-standing position that the retention of co- rights does not render a license to the patent or part of the patent as non-exclusive. The rule also provides that such a reportable asset transfer may occur even if the licensor retains the limited right to manufacture under the patent or part of a patent for the licensee.
Due to the evolution of pharmaceutical patent licenses, the “make, use, and sell” approach is no longer adequate to evaluate the HSR reportability of exclusive patent licenses in the pharmaceutical industry. In this rule, the “all commercially significant rights” test modifies the analysis to address the evolving structure of exclusive patent licenses in the pharmaceutical industry, providing the Agencies with a more effective means of reviewing exclusive patent licenses meeting the statutory requirements under the Act. In effect, however, with the exception of the treatment of the right to manufacture exclusively for the licensee, the rule treats the reportability of exclusive licensing arrangements, including those where the licensor retains co-rights, in the same way that the PNO has for decades.
The “all commercially significant rights” test focuses on whether the licensee receives the exclusive right to commercially use the patent. In such a case, only the recipient of the exclusive rights to the patent may generate revenue from those exclusive rights, even when some of those profits will likely be shared with the licensor through royalties or other revenue sharing arrangements.
An exclusive patent license may be reportable even if it transfers exclusive rights to only a part of the patent – that is, a subset of potential uses under the patent – because only the recipient of the exclusive rights to a part of a patent may generate revenue from those exclusive rights. The rule clarifies that, in the pharmaceutical industry, a patent licensing arrangement constitutes an asset acquisition if it transfers all commercially significant rights to the patent in a particular therapeutic area or specific indication within a therapeutic area. The terms “therapeutic area” and “indication” should provide clear guidance to the pharmaceutical industry, as these terms are well-known in the industry and frequently appear in exclusive patent licenses. A therapeutic area covers the intended use for a part of the patent, such as for cardiovascular use or neurological use, and includes all indications. An indication encompasses a narrower segment of a therapeutic area, such as Alzheimer’s disease within the neurological therapeutic area.
IV. Conclusion
In sum, the “all commercially significant rights” test should provide clarity and consistency to the assessment of whether an asset acquisition is occurring as the result of the transfer of rights to a patent or part of a patent in the pharmaceutical industry. In addition, the test explains that even if there is a retention of “limited manufacturing rights” and “co-rights” the transfer of all commercially significant rights has occurred. The rule thus clarifies the analysis of the reportability of transfers of pharmaceutical patent rights while providing the Agencies with an opportunity to assess under the HSR Act the competitive impact of exclusive pharmaceutical patent licenses that may not have been reportable under PNO staff’s prior approach. The Commission believes these benefits outweigh any potential additional burden on filing parties.