FTC Sets New Rules for Pharma Licenses and Antitrust Approvals

MurinoFeatured Expert Column

Andrea Agathoklis Murino, Wilson Sonsini Goodrich & Rosati

Certain transfers of exclusive patent licenses in the pharmaceutical sector will face new antitrust scrutiny from the Federal Trade Commission (“FTC”).*  In a change to long-standing policy, the FTC announced that the transfer of a license providing an exclusive licensee with “all commercially significant rights” over a patent within a therapeutic area will be reportable under the HSR Act.

Under the old scheme, only the transfer of licenses giving the licensee a right to make, use, and sell the product were subject to the provisions of the HSR Act.  This meant that in cases where a licensor retained the right to manufacture the patented pharmaceutical product, even if the licensee had the exclusive right to use and sell the patented pharmaceutical product, the transfer was deemed non-exclusive and thus non-reportable.  The shift means that parties will need to prepare the HSR Act filing itself, observe the mandatory waiting period before closing (typically 30 days), and, of course, be prepared to respond to any competitive concerns raised by the FTC. 

The FTC explained the policy change was necessary to better reflect the commercial realities associated with these pharmaceutical license transfers.  The FTC noted that it was increasingly common for pharma companies to transfer “most but not all” of the rights.  In these cases, the transfer was functionally exclusive – because the licensee would have all relevant rights to do with the patented product as it saw fit – but the grant remained nominally non-exclusive and therefore exempt from HSR Act notification.  This loophole meant that competitively significant transfers could have occurred while evading the spirit of the HSR Act.

The key question in this rule change will be how to define “all commercially significant rights” in practice.  The FTC explained that the “test focuses on whether the licensee receives the exclusive rights to commercially use the patent” in a particular therapeutic area or in a specific indication within a therapeutic area.  And they continue that if such a grant is awarded, the transaction must be notified.  The FTC hopes this bright line rule will give parties the necessary insights to make their HSR Act filing determinations.  Critics, including some of the largest pharmaceutical trade associations, complain that pharma licensing agreements are rarely this straightforward and that without more explanation, parties will be left to debate what is “commercially significant,” leading to increased cost and delay.

In light of this open definitional question, depending on an agreement’s terms, potentially, transactions that the FTC would view as non-reportable may still result in the parties choosing to make a HSR Act filings in an abundance of caution.  Meanwhile, filings that should be reported may not be despite the best efforts of all involved to hew closely to the correct interpretation.  Stepping back, in theory, the FTC’s decision is sensible in light of its obligations to enforce the antitrust laws generally and the purposes of the HSR Act specifically.  What must happen, however, is for the FTC to engage with all stakeholders in order to provide appreciable guidance to the business community and the antitrust bar to precisely ascertain what is meant by “commercially significant rights.”  The FTC’s Premerger Notification Office has long provided such guidance and I have every expectation they will continue to do so in the future.

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.

*Though the FTC and the Antitrust Division of the Department of Justice share enforcement of the antitrust laws, the review of conduct and transactions affecting the pharmaceutical industry have long been assigned to the FTC and not the DOJ.

One thought on “FTC Sets New Rules for Pharma Licenses and Antitrust Approvals

  1. Pingback: Court Upholds FTC Rule for Pharma Patent License Transfers | The Legal Pulse

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