Expanded FTC Premerger Notification Rules Specific to the Pharmaceutical Industry are Upheld by the D.C. Circuit

Kelley Drye Client Advisory

The D.C. Circuit recently affirmed a lower court’s decision upholding regulations adopted by the Federal Trade Commission (FTC) requiring a Hart Scott Rodino (HSR) Act premerger notification filing for transfers of patent rights within the pharmaceutical industry if all commercially significant rights” are transferred, regardless of whether patent holders retain limited rights or co-rights.

Prior to the FTC’s clarification, an acquisition of pharmaceutical patent rights would not trigger an HSR filing obligation if the seller retained certain manufacturing rights.  The agency focused on whether the exclusive rights to make, use and sell” under a patent were being transferred.  A transfer of limited rights under the patent could trigger an HSR filing exemption.  A filing would not have been required, for example, if a licensor retained the right to manufacture a product or compound for the licensee.

The change to the new, all commercially significant rights” test is intended to cover a broader scope of transactions.  According to the FTC, it became common for pharmaceutical companies to transfer most but not all of the rights to make, use, and sell” under an exclusive license.  The clarifying rule now specifically requires an HSR premerger notification filing when a transaction will result in a transfer of all commercially significant rights” of a pharmaceutical patent, including circumstances in which the licensor retains limited manufacturing or co-rights, such as for development, marketing or promotion.

The pharmaceutical industry group, the Pharmaceutical Research and Manufacturers of America (PhRMA), argued against the FTC promulgating a rule that applies only to the pharmaceutical industry.  The court disagreed, finding that, although Congress did not address the precise question at issue, the FTC did have the authority to implement industry-specific HSR filing triggers, and reasonably explained and supported its position during the rulemaking process.

The FTC’s attention to pharmaceutical patent transfers is consistent with its increasing focus on competition in healthcare markets.  The agency has been quick to act on issues impacting the timing of generic drug options, hospital and health practice mergers, as well actions by states and state professional boards that impact competition.  With additional actions by the agency very likely, diligence is warranted in transactions involving pharmaceutical patents, as well as those impacting healthcare generally.

For more information, please contact:

David H. Evans
(202) 342-8479