The Federal Trade Commission ("FTC") this week adopted
a significant change to the notification rules under the Hart Scott
Rodino ("HSR") Act that will increase the number of
pharmaceutical patent licenses covered by the Act. The amendments
apply explicitly only to pharmaceutical patent licenses. They
likely will have the largest impact on those arrangements where the
licensor retains only a limited right to manufacture for the
licensee under the licensed patent, which previously had been
non-reportable under the FTC's interpretation of the HSR
Act.
The rule of thumb for the application of the HSR Act to patent
licenses is that a license is not reportable if it is
non-exclusive, but may be reportable if it is
exclusive and otherwise meets the requirements for
reportability, including being valued above a minimum threshold
that is adjusted annually (currently $70.9 million). The amendments
leave this basic principle intact, but clarify—and partially
modify—what constitutes an exclusive license for the purpose
of the HSR Act in the pharmaceutical industry. Notably, under the
FTC's previous interpretations of the HSR Act, an exclusive
patent license was one that gave the licensee the right to make,
use and sell under the patent or part of the patent to the
exclusion of everyone else, including the licensor. Under
this approach, if the licensor retained the right to manufacture,
even if only for the licensee, the license arrangement was
non-reportable.
Under the amended rules, a license of pharmaceutical patent rights
is potentially reportable if the transaction conveys "all the
commercially significant rights to a patent . . . for any
therapeutic area (or specific indication within a therapeutic
area)." The relevant question under this test is whether the
transaction allows "only the recipient of exclusive patent
rights to use the patent in a particular therapeutic area (or
specific indication within a therapeutic area)." The amendment
codifies existing guidance that the grant of an exclusive license
does not escape reportability under the HSR Act merely because the
patent owner retains "co-rights," such as the right to
"co-development, co-promotion, co-marketing, and
co-commercialization." However, as noted above, the amendment
changes the FTC's approach to exclusive licenses in which the
patent owner retains the right to manufacture exclusively for the
licensee. Under the amended rules, these licenses will be
reportable assuming the other HSR Act requirements (such as the
$70.9M size-of-transaction threshold) are met.
Although the new rule only covers the pharmaceutical industry, the
FTC advises that similar types of licenses in other industries may
be reportable under the Act, and suggests that parties consult with
the FTC's Premerger Notification Office on a case-by-case basis
to determine whether particular arrangements require HSR
notification.
The FTC estimates that 30 additional transactions per year will
require notification under the HSR Act as a result of the amended
Rules. A failure to make a required notification subjects the
parties to penalties of up to $16,000 per day until the filing is
made.
The amendments will become effective 30 days after publication in the Federal Register, which is expected in the near future.
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