Patent Licensing Deals Could Be More Costly Under FTC Proposed Rules

Federal Trade Commission is proposing to amend pre-merger notification rules related to the transfer of exclusive patent rights in the pharmaceutical industry; the change would require reporting transactions in which the licensor retains exclusive manufacturing rights.

Pharmaceutical companies may have to get approval from the Federal Trade Commission and Department of Justice to complete certain patent licensing deals under new rules proposed by the FTC, a change that could increase the cost of the transaction.

FTC’s proposal would amend pre-merger notification rules related to the transfer of exclusive patent rights in the pharmaceutical industry. The change would apply to deals in which the licensor retains rights to manufacture exclusively for the licensee.

Under the Hart-Scott-Rodino Act, parties to certain mergers and acquisitions must notify the FTC and DoJ before consummating the proposed transaction and wait a specific period, usually 30 days, while the agencies review it. Currently, if a licensor retains rights to manufacture a product in most instances it does not have to report the transaction under the Act. Under the proposed rules, a deal in which a licensor retains the right to manufacture exclusively for the licensee is a potentially reportable asset acquisition.

“It will definitely increase the cost of doing a deal,” said David Wales, a partner at Jones Day and former acting director of the FTC’s Bureau of Competition. He noted that the fee under the Hart-Scott-Rodino Act can be as high as $280,000 per transaction and a delay of 30 days to consummate the deal could also add to the financial burden.

Wales said FTC staff have long wanted to amend the pre-merger notification rules.

“There are a small number of transactions not reportable today that raise antitrust issues,” he said. “The FTC wants to close the loophole so transactions are not immune from early warning.”

30 More Transactions Per Year Would Require Notification

In a notice of proposed rulemaking published Aug. 13, FTC explained that in determining whether the transfer of rights to a patent is an asset acquisition, the agency’s Premerger Notification Office (PNO) focuses on whether the exclusive rights to “make, use and sell” under a patent are being transferred by the license. If the licensor retains the right to manufacture, the deal is, in most instances, non-reportable.

“For instance, some licensing agreements involve the exclusive use and sale of a patent, but typically allow the licensor to retain manufacturing rights for the patent,” the agency said. “Under the current PNO approach, these exclusive licenses are not reportable since, without the right to manufacture, they are viewed as distribution agreements rather than asset acquisitions.”

However, the FTC said that in licensing arrangements in the pharmaceutical industry, the right to manufacture is far less important than the right to commercialize.

“As a result, pharmaceutical companies often enter into licenses in which the licensee receives the exclusive right to use and sell under the license, but the licensor retains the right to manufacture exclusively for the licensee,” the FTC said. “As the licensor is manufacturing solely for the use of the licensee, this is substantively the same as giving the licensee the exclusive right to manufacture, use and sell the product(s) covered by the license.”

The FTC said that when the licensor retains limited manufacturing rights, it is still transferring all commercially significant rights to the licensee and a potentially reportable asset acquisition is taking place.

The agency said that because these arrangements have been limited to the pharmaceutical industry, it has limited the proposed rule to analyzing the transfer of rights to a patent in this industry. However, the FTC said the transfer of exclusive rights to a patent in other industries remains a potentially reportable event.

Bilal Sayyed, a partner at Kirkland & Ellis who served as advisor to former FTC Chairman Timothy Muris, said it is tricky to tell how many new filings would be required under the proposed changes.

“There is nothing in the proposed rule that identifies anything they believe they are missing that is material to a substantive filing,” Sayyed said.

FTC estimates there will be an increase of 30 transactions per year requiring non-index Hart-Scott-Rodino filings due to the proposed rule change. Index filings pertain to bank transactions, which are not covered by the proposed amendments. The staff also estimates labor costs under the proposed rules will be $25.9 million, an increase of $1.2 million from the estimate for the current rules.

The notice gives examples of licenses that would be covered by the rules. In one example, a company holding a patent relating to a biological product grants another company an exclusive license to all its patent rights in all therapeutic areas. The two also enter into a co-development and co-commercialization agreement under which the licensor cannot separately use the patent in the same therapeutic area as the licensee. The licensee will book all sales of the product and pay the licensor a portion of the profits. FTC said that despite the licensor’s retention of co-rights, the licensee is still receiving all commercially significant rights and the licensing agreement is an asset acquisition.

FTC has long focused on patent settlements in the pharma industry in which a brand company pays a generic manufacturer to delay launching a generic. But Wales said there is no connection between that issue and notification of the transfer of patent rights, which is handled by different staff.

The only link between the two is that the FTC makes the pharmaceutical industry a priority in antitrust enforcement, Wales said.

The day it announced the proposed reporting rules, the FTC also issued a release noting that it had filed an amicus brief in a private action alleging Teva Pharmaceutical Industries Ltd. agreed to delay its introduction of a generic version of Wyeth’s antidepressant Effexor XR while Wyeth (now Pfizer Inc.) agreed to refrain from marketing an authorized generic. The case, In re: Effexor XR Antitrust Litigation, is before the U.S. District Court for the District of New Jersey. FTC filed the brief to address a decision by the U.S. Court of Appeals for the Third Circuit reinstating a suit challenging a patent settlement agreement involving K-Dur (Also see "Reverse Payment Settlements Suffer Reversal Of Fortune At Third Circuit" - Pink Sheet, 16 Jul, 2012.).