The U.S. Federal Trade Commission’s new proposed Hart-Scott-Rodino Act rules will apply only to transfers of pharmaceutical patent rights and are expected to increase the number of filings.  Comments on the proposed rules will be accepted until October 25, 2012.


The U.S. Federal Trade Commission (FTC) announced proposed changes to the Hart-Scott-Rodino (HSR) Act premerger notification rules that will broaden the circumstances under which parties must file premerger notifications in connection with the transfer of exclusive rights to pharmaceutical patents.  The proposed rulemaking is meant to clarify when a transfer of exclusive rights to a pharmaceutical patent is considered a potentially reportable acquisition of an asset under the HSR Act.  This action maintains the FTC’s focus on monitoring competition in the pharmaceutical industry.

The FTC’s current position—although never actually codified—is that the transfer of exclusive rights to “make, use and sell” a product under a patent is an acquisition of an asset for which parties may be required to file HSR notifications if the reporting thresholds are met.  Conversely, the FTC has long held that the grant of exclusive marketing and distribution rights, but not manufacturing rights, is not a transfer of an asset, and not reportable.  The FTC’s emphasis on the transfer of an exclusive right to manufacture results in scenarios in which parties are not required to report the transfer of patent rights because the licensor retained the right to manufacture the product, although it transferred the exclusive rights to commercialize the product.

The proposed rulemaking attempts, first, to amend and codify the FTC’s position, and second, to place the substance of the transaction above the form of the transfer.  Although these transfers of patent rights typically take the form of a license, the FTC is careful to not restrict the rule to just licenses, but to capture any transfer of exclusive patent rights, regardless of the form.  The rulemaking proposes an “all commercially significant rights” test, focused on whether there is a transfer of “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).”  The proposed rulemaking further clarifies that all commercially significant rights are deemed to be transferred even if the patent holder retains limited manufacturing rights for the purpose of providing the licensee with product(s) covered by the patent, or co-rights to assist the licensee in developing and commercializing the product(s) covered by the patent.  If that “all commercially significant rights” test is met, the transfer is a potentially reportable acquisition of assets.  Put differently, under the proposed rulemaking, parties to a transfer of exclusive rights to a patent would be required to file HSR notifications if all of the following apply:

  • The transfer meets the “all commercially significant rights” test
  • The exclusive rights to be transferred have a fair market value of more than $68.2 million
  • Generally, where the fair market value of the exclusive rights to be transferred is below $263.8, one party to the transaction has net sales or total assets of at least $13.6 million and the other party to the transaction has net sales or total assets of at least $136.4 million
  • No exemption under the HSR rules applies to the transaction

The dollar thresholds noted above are adjusted annually to reflect the increase or decrease in gross national product.  Per the HSR rules, the fair market value must be determined in good faith by the acquiring party’s board of directors (or its designee) within 60 calendar days prior to submitting an HSR filing or, if no filing is required, 60 calendar days prior to closing the transaction.  Beyond that, the HSR rules do not prescribe the method of valuation an acquiring person must use.

Notably, this proposed rule-making applies exclusively to patents in the “pharmaceutical, including biologic, and medicine manufacturing industry.”  As the FTC explains, these arrangements create unique dynamics in the pharmaceutical industry because in the typical situation, a smaller innovation firm that likely could not successfully develop and commercialize the product grants rights to a large pharmaceutical firm that then takes control of development and ultimate commercial sales (if it succeeds).  This is different from a standard distribution agreement in which a manufacturer with an existing product selects another company to be the distributor. 

The FTC has promulgated exemptions to the HSR Act targeted to specific industries, such as certain real property (including hotels, recreational land, agricultural property and investment rental property, among others) and oil and gas reserves, where certain transactions in those industries are unlikely to raise competitive concerns.  However, the FTC has not previously promulgated a rule impacting a specific industry that would capture more transactions than would otherwise be reported under the HSR Act.  The FTC estimates that 30 additional transactions per year will be reported as a result of the proposed rule change.  This represents a 2 percent increase in the average number of expected filings for fiscal years 2012 through 2014.  By limiting the proposed rule to the pharmaceutical industry, the FTC has retained the key focus on manufacturing rights when evaluating exclusive licenses in other industries.  Because of that distinction, licenses or transfers in which a manufacturer grants exclusive marketing or distribution arrangements in other industries (such as consumer goods or alcohol products) continue to be treated as distribution agreements—not transfers of assets—and thus not subject to the HSR Act. 

The text of the proposed rulemaking can be found here.  The FTC is accepting comments from interested parties until October 25, 2012.